Category: Morning Markets Brief

Summary and Price Action Rundown

Global risk assets retreated sharply overnight as investor concerns over the expanding outbreak of the SARS-like virus in China and overseas deepened following a weekend of disquieting developments. S&P 500 futures point to a 1.4% lower open to start the week after Friday’s cautious decline of 0.9%, which would put the index about 2.5% below its record high from earlier this month. Investors continue to ponder the ramifications of the viral outbreak emanating from central China as reports of its spread cloud global growth expectations and market sentiment generally (more below). Overnight, equities in Asia posted losses of 1-3%, though mainland Chinese and other regional stock markets remain closed for the Lunar New Year holiday. In the EU, stocks are posting declines of similar magnitude. The rising risk aversion is driving demand for safe havens like Treasuries, with the 10-year yield down 6 basis points to 1.63%, a three-month low, while the dollar is edging higher. Crude oil is continuing its downtrend, with Brent at its lowest level since October, below $59 per barrel, and OPEC is already discussing options for further output cuts to support prices.

Continued Spread of Wuhan Virus Dispels Market Calm

As numbers of reported infections and fatalities continue to rise, alongside indications of severe contagiousness, investors are increasingly doubtful that tight travel controls around the epicenter of the virus in Wuhan and other official measures in China will succeed in stemming the spread. With reported cases rising to 2,794 and deaths increasing to 80, investors are nervously continuing to monitor the expanding contagion. Over the weekend, analysts focused on reports detailing the highly contagious nature of the virus, which unlike SARS can spread during an asymptomatic gestation period that is estimated to last an average of ten days and as long as fourteen days in some cases. This concerning revelation, combined with reports that five million people departed the Wuhan area in the days before travel restrictions were imposed, has intensified already heightened uncertainty about the scope of the outbreak. Outside of Asia, where the infections and equity losses have been concentrated, risk appetite had remained generally resilient until last Friday’s sobering reports that sixteen Chinese cities and roughly 46 million people were under varying degrees of travel restrictions. Meanwhile, mainland markets, which closed starting last Friday for the Lunar New Year holiday, will stay shut beyond their scheduled reopening on Friday. Cases outside of China remain limited thus far, with isolated infections in the US, Canada, France, Japan, Thailand, Singapore, South Korea, Taiwan, Hong Kong, Vietnam, Malaysia, and Macau.

 Corporate Earnings Season Enters Key Period

Analysts continue to expect this week’s calendar of fourth quarter (4Q19) corporate reports to provide support for equities, but the stakes are higher as disappointments will be magnified in the current climate of rising risk aversion. Last week’s array of earnings was broadly upbeat but featured some uneven results. On Friday, shares of chip giant Intel soared 8.1% after 4Q19 earnings and revenue handily beat consensus expectations. More importantly, Intel management forecast better-than-expected results for 1Q20. Meanwhile, shares of American Express rose 2.8% after reporting 4Q19 earnings which beat expectations with a “well-balanced mix” of fee, spending and lending revenues. However, results were not so rosy at competitor Discover Financial whose shares plummeted as much as 10% before recovering in late trading after the credit card company reported the total net charge-off rate in their loan book rose to 3.19%. Also, consumer lender Synchrony Financial fell 9.9% after missing revenue projections. Of the 86 S&P 500 companies that have reported 4Q19 results, 73% have topped earnings expectations and 66% have beaten sales estimates. The busiest segment of earnings season still lies ahead, with Apple, Microsoft, Facebook, Amazon, McDonalds, Boeing, UPS, Coca-Cola, Caterpillar, ExxonMobil, Starbucks, Lockheed Martin, Tesla, Whirlpool, UPS, Pfizer, 3M, and Honeywell among the key reports due this week.

          Additional Themes

Setback for Italian Populists Supports Local Bonds – Yesterday, a regional election in Emilia-Romagna proved to be a bulwark for the Democratic Party as a challenge from the right-wing populist Lega party fell short. With the fragile national ruling coalition of the Democratic Party and Five Star on increasingly shaky ground following the resignation of the Five Star leader earlier this month, analysts had speculated that a Lega win in traditionally left-leaning Emilia-Romagna could spark early elections. Italian bonds are posting a strong rally today, retracing much of their recent sell-off relative to German bunds.

Disappointing German Economic Data – The Ifo Institute’s survey of Germany’s business climate relapsed with a downside surprise for January, further clouding analysts’ nascent EU economic optimism that had already been dented by virus fears.

Summary and Price Action Rundown

Global risk assets steadied overnight as investors remain wary and reactive to news of the expanding outbreak of the SARS-like virus in China while parsing US corporate earnings and some key global economic data this morning. S&P 500 futures indicate a 0.2% higher open after another directionless session yesterday, which would put the index back to its record high from Friday. Investors continue to ponder the ramifications of the viral outbreak emanating from central China as reports of its spread cloud global growth expectations and market sentiment generally. Overnight, equities in were mostly higher, but mainland Chinese stock markets have begun a week-long closure for the Lunar New Year holiday. In the EU, stocks are outperforming amid upbeat corporate news. Treasuries are ceding some gains from their recent rally though investor demand for safe havens remains elevated, while the dollar is edging up as central bank easing expectations depress the pound and the euro (more below). Crude oil remains under pressure, with Brent at its lowest level in over a month, below $62 per barrel, as analysts continue focus on worsening demand risks and ample US shale oil supply.

Investor Sentiment Holds Up Despite Ongoing Virus Outbreak

Numbers of reported infections and fatalities continue to rise, but investors are hopeful that mandatory screening and tight travel controls around the epicenter of the virus in Wuhan will stem the spread. With reported cases rising to 881 and deaths increasing to 26, investors are warily continuing to monitor the expanding contagion. Outside of Asia, where the infections and equity losses have been concentrated, risk appetite remains generally resilient as analysts assess the effectiveness of China’s intensifying efforts to contain the spread. Reports this morning indicate that ten Chinese cities and roughly 40 million people are under varying degrees of travel restrictions and many public and private venues are cancelling events. Meanwhile, mainland markets will be closed for a week starting today for the Lunar New Year holiday. Cases outside of China remain limited thus far, with isolated infections in the US (Washington state), Japan, Thailand, Singapore, South Korea, Taiwan, Hong Kong, and Macau.

 Corporate Earnings Remain Broadly Supportive of Stocks

The second week of fourth quarter (4Q19) corporate reporting season is closing out on a generally upbeat note as investors look ahead to key releases next week. Shares of Intel are 6.0% higher in pre-market trading, heading for a new 20-year high, after the chip giant handily topped both earnings and revenue forecasts for 4Q19 and management conveyed a positive outlook for this year. Results for last quarter were also supportive for shares of US pipeline operator Kinder Morgan yesterday, as well as for US railroad operator Union Pacific. There was some unevenness to yesterday’s results, however, as insurance giant Travelers, investment bank Raymond James, consumer bellwether Procter & Gamble, and mining giant Freeport MacMoRan posted varying degrees of disappointments for investors. Of the 79 S&P 500 companies that have reported 4Q19 results, 73% have topped earnings expectations and 67% have beaten sales estimates. American Express reports this morning to close the week. The busiest segment of earnings season still lies ahead, with Apple, Microsoft, Facebook, Amazon, McDonalds, Boeing, UPS, Coca-Cola, Caterpillar, ExxonMobil, Starbucks, Lockheed Martin, Tesla, Whirlpool, UPS, Pfizer, 3M, and Honeywell among the key reports due next week.

          Additional Themes

Mixed EU Economic Data – January’s preliminary composite purchasing managers’ index (PMI) for the EU undershot estimates, printing 50.9 to match the prior month’s reading versus a consensus forecast of improvement to 51.2. For context, PMI readings above 50 denote expansion. The underlying details were somewhat more encouraging than the headline figure, however, as the manufacturing PMI, which has been the main source of weakness in the region, improved to 47.8, beating estimates of 46.8 and December’s 46.3. Services PMI dipped to 52.2 versus expectations for this gauge to remain steady at 52.8. Importantly, Germany’s manufacturing and services PMI readings both posted upside surprises, although the former remained in contractionary territory at 45.2. This follows yesterday’s decision by the European Central Bank (ECB) to keep policy settings on hold. This morning, however, President Lagarde indicated that ECB policy is not on “autopilot,” which sent the euro lower, as most analysts expect that any additional moves would be further accommodation.

Better UK Economic Data – The UK’s January PMI readings beat projections on both the manufacturing and service segments, which dampened expectations for a rate cut by the Bank of England (BoE) next week, though futures still see 48% odds of a move from 0.75% to 0.5%.

 Next Week – In addition to earnings and the BoE and Fed meetings, analysts will be attuned to US 4Q GDP, December’s US income, spending, and price data, and China’s December PMI.

Summary and Price Action Rundown

Global risk assets were mostly lower overnight as investors continue to monitor China’s efforts to contain the outbreak of a SARS-like virus while awaiting more US corporate earnings and a European Central Bank meeting this morning. S&P 500 futures point to a flat open after yesterday’s choppy session, which would hold the index just below its record high from Friday. Investors continue to ponder the ramifications of the viral outbreak emanating from central China as reports of its spread dampen global growth expectations and market sentiment generally. Overnight, equities in Asia turned lower again, with mainland Chinese stocks leading to the downside before a week-long closure for the Lunar New Year holiday. Meanwhile, EU stocks are dipping ahead of the European Central Bank decision. Treasuries are extending their recent rally as investors seek safe havens, while the dollar remains flat. Crude is continuing to slide as analysts focus on demand risks and ample US shale oil supply. 

Concerns Over the Virus Outbreak Keep Global Equities in Check

While numbers of reported infections and fatalities continue to rise, investors are hopeful that newly implemented mandatory screening and tight travel controls around the epicenter of the virus in Wuhan will stem the spread. With reported cases rising to 555 and deaths increasing to 17, alongside the first infection in Hong Kong, investors are wary of expanding contagion. Outside of Asia, where the infections and equity losses have been concentrated, risk appetite remains generally resilient as analysts assess the effectiveness of China’s intensifying efforts to contain the spread. Reports over the last day have focused on tightened travel restrictions around the epicenter of the outbreak in Wuhan and the surrounding cities, as well as mandatory screening. The Shanghai Composite sank 2.8% overnight to put losses at 3.9% since the first reports of the outbreak. Meanwhile, the renminbi continued its slide below its recent five-month highs versus the dollar, losing 0.4% overnight for a three-day decline of 1.0%. For context, mainland markets will be closed for a week starting tomorrow for the Lunar New Year holiday. Experts note that the holiday poses a substantial risk of dramatically widening the outbreak given that tens of millions of Chinese travel home or to a vacation destination for the holiday week. Cases outside of China remain limited thus far, with isolated infections in the US (Washington state), Japan, Thailand, South Korea, Taiwan, Hong Kong, and Macau.

 Corporate Earnings Remain Broadly Upbeat Despite Some Uneven Results

Yesterday’s fourth quarter (4Q19) corporate reports again featured a number of high-profile upside earnings surprises, although some disappointments were in the mix. Shares of Capital One jumped 4.5% after the bank reported 4Q earnings of $2.49 a share, which topped analyst’s estimates of $2.37. The beat was driven by higher loan and deposits along with strength in the credit card business. However, shares of regional bank Zions fell 4.1% after reporting a fourth straight quarter of declining loan balances. Northern Trust also saw its share price fall, losing 3.3% in trading yesterday as earnings per share of $1.70 came in below expectations of $1.77 along with rising expenses that were above analyst’s estimates. After Tuesday’s closing bell, Netflix issued nuanced results, with earnings beating estimates but new subscribers coming in lower than expected, sending its shares down 3.6% yesterday. Meanwhile, IBM impressed analysts, beating both sales and profit projections on strong cloud computing business, lifting its shares 3.4%. Of the 64 S&P 500 companies that have reported 4Q19 results, 71% have topped earnings expectations and 67% have beaten sales estimates. Intel, Comcast, Proctor & Gamble, American Airlines, Discover, Southwest, and Freeport McMoRan all issue earnings today, while American Express reports tomorrow to close the week.

          Additional Themes

European Central Bank (ECB) in the Spotlight – In her second meeting as head of the ECB, President Lagarde is set to detail the upcoming strategic policy review that she is spearheading, which is due to be published in about a year. She has indicated that the focus of the review will be on the ECB’s approach price stability, while tackling climate change will be a key consideration. Otherwise, policy settings are expected to remain fixed at today’s meeting. This comes after the Bank of Canada (BoC) left its benchmark interest rate unchanged at 1.75% yesterday but shifted to a more accommodative tone, sending the Canadian dollar 0.7% lower versus the US dollar since the meeting. Next week, the Bank of England meets, with futures markets pricing in 58% odds of a cut in the policy rate from 0.75% to 0.5%.

 Crosstalk on EU Car Tariffs – Although the tone from the World Economic Forum in Davos has been generally constructive, analysts are parsing mixed signals from the Trump administration on the possibility of imposing tariffs on EU autos. While President Trump stated yesterday that he would be “very surprised” if he had to implement tariffs on European cars, he and other administration officials have reiterated to threat to do so in the absence of a trade deal.

Summary and Price Action Rundown

Global risk assets retraced some of yesterday’s losses overnight amid hopes that China’s augmented public health efforts will limit the outbreak of a SARS-like virus, while investors continue to monitor signs of a nascent global growth rebound and upbeat US corporate earnings. S&P 500 futures indicate a 0.3% gain at the open, which would return the index nearly to its record high from Friday as investors bet on a limited spread of the virus from its origin in Wuhan, China. US equities have been buoyant this month as investors focus on easing global trade tensions, an increasingly positive tone in fourth quarter earnings reports, and some encouraging global economic readings in recent days. Overnight, equities in Asia began today’s rebound, though EU stocks are underperforming as resurgent Italian political uncertainty weighs on its domestic equities (more below). Despite the more optimistic tone in markets today, Treasuries are retaining yesterday’s rally, while the dollar is flat. Crude is lower again today as analysts focus on the downside risk to demand and ample US shale oil supply.

Concerns Over the Virus Outbreak Ease as China Boosts Response

Although numbers of reported infections and fatalities continue to rise, investors are hopeful that newly implemented mandatory screening and tight travel controls around the epicenter of the virus in Wuhan will stem the spread. With reported cases rising to 440 and deaths increasing to nine, alongside the first infection in Hong Kong, investors are wary of expanding contagion but risk appetite remains resilient as authorities boost their response. For context, yesterday’s initial reports of the coronavirus, which is being compared to the SARS outbreak from seventeen years ago, derailed the ongoing rally for global stocks. During the US session, midday news of the first US case, located in Washington state, reversed an early session rebound for the S&P 500, with shares of luxury goods companies and airlines underperforming. Experts note that the Chinese Lunar New Year holiday, which begins this Friday, poses a substantial risk of dramatically widening the outbreak given that tens of millions of Chinese travel home or to a vacation destination for the holiday week. The Shanghai Composite rebounded 0.3% overnight after falling 1.4% yesterday, while the renminbi steadied after declining 0.5% from five-month highs versus the dollar. For our independent MPP viewpoint on the potential ramifications of this outbreak on markets, policy, and the economy, (as well as other key macro issues of the day) please sign up for our Markets Policy PRO subscription https://marketspolicy.com/markets-policy-professional/

 US Corporate Earnings Continue to Impress

Fourth quarter (4Q19) corporate results remain supportive of US equities amid more high-profile upside earnings surprises. After yesterday’s closing bell, Netflix issued nuanced results, with earnings beating estimates but new subscribers coming in lower than expected. Investors are focusing on the positive outlook from management, however, and Netflix shares are up 2.1% in pre-market trading. Meanwhile, IBM impressed analysts, beating both sales and profit projections on strong cloud computing business, sending its shares 4.2% higher ahead of today’s opening bell. Last week, shares of JPMorgan, Morgan Stanley, Goldman Sachs, and Citi all rallied after their results, kicking off 4Q19 earnings season on a positive note. Other reporting companies that impressed investors last week include rail giant CSX, financial services mainstay Charles Schwab, and asset management leader BlackRock. Trucker JB Hunt, oilfield services provider Schlumberger, and industrial bellwether Fastenal were among the few disappointments, and shares of each experienced only moderate downside. Of the 54 S&P 500 companies that have reported 4Q19 results, 71% have topped earnings expectations and 67% have beaten sales estimates. Today’s reports feature Johnson & Johnson, Northern Trust, Baker Hughes, and Raymond James. Progressive, American Airlines, Discover, Intel, Southwest, M&T Bank, Proctor & Gamble, Starbucks, Travelers and American Express all report later this week.

Additional Themes

Italian Political Uncertainty – Signs that the fragile coalition government formed by the populist Five Star party and its unnatural allies in the moderate Democratic Party may be in its final days are weighing on local assets, although price action remains moderate. The benchmark Italian equity index is down 0.3% with shares of local banks leading to the downside with losses of 1.7%. However, Italian bank stocks recently touched their best level since September 2018 earlier this month, so they remain well shy of 2019’s lows. Italian bonds are also lagging, but their yield spread over German bunds (a key market-based indicator of Italian sovereign risk) is only 2 basis points wider to 1.63% today, barely wider than its best level in two years.

 Trump Touts Tax Cuts – In remarks from the World Economic Forum at Davos this morning, President Trump indicated that his administration would issue a middle class tax cut proposal in the coming days. He also made relatively balanced comments on the dollar, the Fed, and trade.

Summary and Price Action Rundown

Global risk assets posted moderate losses overnight as concerns over an expanding health crisis emanating from China overshadow prevailing optimism over the nascent global growth rebound and US corporate earnings. S&P 500 futures point to a 0.3% decline at the open, which would take the index just below its third consecutive record high from Friday. US equities have been buoyant this month as investors focus on easing global trade tensions, an increasingly positive tone in fourth quarter earnings reports, and some encouraging global economic readings in recent days. Now, concerns over the spread of a virus from central China are introducing an unanticipated challenge to the upbeat outlook, much as geopolitical factors did to start the year. Overnight, equities in Asia underperformed, given proximity to the outbreak, while EU stocks are further pressured by poor earnings by mega-bank UBS. Treasuries are rallying modestly amid the increased risk aversion, while the dollar is little changed despite a 0.5% decline for the renminbi from recent five-month highs versus the dollar. Renewed doubts over demand growth are weighing on crude oil, which had received a boost from supply disruptions in Libya and fears of similar dynamics brewing in Iraq.

Public Health Concerns in China and Political Unrest in Hong Kong Hit Markets

The rapid spread of an apparently new deadly viral respiratory illness that originated in Wuhan, China is weighing on investor sentiment in Asia and beyond, while resurgent political tensions compounded pressure on Hong Kong markets overnight. Reports of hundreds of cases of the coronavirus, which is being compared to the SARS outbreak from seventeen years ago and is said to have resulted in four deaths thus far, have derailed the upside momentum for global risk assets that has been building over the past few weeks. Cases are being reported in South Korea, Thailand, and Japan, and US authorities are establishing quarantine procedures at major airports for incoming travelers from the region. Experts note that the Chinese Lunar New Year holiday, which begins this Friday, poses a substantial risk of dramatically widening the outbreak given that tens of millions of Chinese travel home or to a vacation destination for the holiday week. The Shanghai Composite fell 1.4% overnight while the renminbi lost 0.5% versus the dollar. For context, Chinese equities and the renminbi had been rallying for the past month, underpinned by improving trade relations with the US, moderately encouraging economic readings, and prospects for more economic stimulus by Beijing. Although China’s fourth quarter GDP was 6.0% year-on-year (y/y), putting the full year growth rate was down to 6.1%, the slowest expansion in nearly thirty years, details from December indicated an uptrend, buoying hopes for an economic reacceleration this year. Meanwhile, equities in Hong Kong fell 2.8% as news of the virus combined with re-intensifying political tensions to deepen the selloff. After a lull in recent weeks, protests resumed on Sunday and China’s main representative in the region urged the Hong Kong government to pass a stricter security law in a state media op-ed. Analysts note that efforts to enact such a security law were met in 2003 with mass protests.

 US Corporate Earnings Expected to Remain Supportive of Equities

Investors remain optimistic on fourth quarter (4Q19) corporate results after the S&P 500 powered to a series of record highs last week amid high-profile upside earnings surprises. Last week, shares of JPMorgan, Morgan Stanley, Goldman Sachs, and Citi gained 1.5%, 10.1%, 3.1%, and 2.4%, respectively, after US mega-banks kicked off 4Q19 earnings season on a positive note. Other reporting companies that impressed investors last week include rail giant CSX, financial services mainstay Charles Schwab, and asset management leader BlackRock. Trucker JB Hunt, oilfield services provider Schlumberger, and industrial bellwether Fastenal were among the few disappointments, and shares of each experienced only moderate downside. Of the 47 S&P 500 companies that have reported 4Q19 results, 73% have topped earnings expectations and 63% have beaten sales estimates. Today features reports from Netflix, IBM, Capital One, Haliburton, and United Airlines. Johnson & Johnson, Las Vegas Sands, Northern Trust, Progressive, American Airlines, Freeport McMoRan, Discover, Intel, Southwest, M&T Bank, Proctor & Gamble, Starbucks, Travelers and American Express all report later this week.

          Additional Themes

Easing US Trade Offensive – Following last week’s signing of the Phase One US-China trade deal and Senate approval of the US-Mexico-Canada trade deal, the outlook for US trade policy continues to brighten as reports yesterday indicated that President Trump and French President Macron had agreed to a tariff “cease fire” until year-end.

 Mixed Global Growth Signals – The Bank of Japan held policy steady but slightly upgraded their economic outlook, although the IMF over the weekend pared their 2019 global growth forecast from 3.4% to 3.3%. Meanwhile, in Germany, the ZEW gauge of economic expectations unexpectedly popped to a four-year high, and in the UK, labor market data bettered estimates.

Summary and Price Action Rundown

Global risk assets are extending their upside this morning as Chinese economic data suggested a burgeoning rebound while US corporate earnings remain positive. S&P 500 futures indicate a 0.2% gain at the open, which would send the index to a fresh record high for the third consecutive session. US equities have been buoyant this month as investors focus on easing global trade tensions, an increasingly positive tone in fourth quarter earnings reports, and some encouraging global economic readings in recent days. Geopolitical risks, which roiled markets to start the year, have receded into the background for now. Overnight, equities in Asia and the EU resumed their uptrend after struggling to find direction earlier this week. Treasury yields are flat this morning, as analysts note the announcement that 20-year Treasuries will be issued in the first half of this year. Meanwhile, the dollar is slightly higher as dismal UK retail sales figures and weak EU inflation data weighs on the pound and euro, respectively. Crude oil is continuing to rise from one-month lows, with Brent topping $65.

Improving Chinese Economic Data Strengthens Growth Optimism

After yesterday’s array of uniformly strong US economic data, upside surprises for China’s December activity readings added further support for expectations of a global growth rebound in 2020. Although China’s fourth quarter GDP was in-line with expectations at 6.0% year-on-year (y/y) and the full year growth rate was down to 6.1% from 6.6% last year, representing the slowest expansion in nearly thirty years, details from December indicated an uptrend, buoying hopes for an economic reacceleration this year. Industrial production evidenced the most significant improvement last month, jumping to 6.9% y/y to easily top the consensus expectation of 5.9% and the prior month’s 6.2%. Fixed asset investment, which is published on a year-to-date basis, was 5.4%, beating the estimate of 5.2%, which would have matched November’s pace. Lastly, retail sales were slightly better than expected at 8.0% y/y, which is level with the November reading. This comes after China’s total aggregate financing for December, which is its most comprehensive measure of credit extension, posted a significant upside surprise yesterday, signaling Beijing’s intent to stimulate the economy. Recent US data has also been supportive of the consensus among investors for a moderate 2020 growth rebound. In December, retail sales in the US rose 5.8% y/y, which is the biggest annual increase since August of 2018. For context, retail sales increased 3.6% for the full year 2019, down from a 4.9% gain in 2018, which was the largest in six years on the boost from tax cuts. UK retail sales, however, posted a dramatic downside surprise in December, boosting rate cuts odds.

 Increasingly Upbeat Corporate Earnings Lift Equities

The S&P 500 powered to another record yesterday as high-profile upside surprises continued in fourth quarter (4Q19) corporate results. Shares of Morgan Stanley jumped 6.7% after strong 4Q19 earnings that came in well above analyst expectations. Profits rose 46% to $1.30 per share versus expectations of 99 cents. Revenue climbed 27% to $10.86 billion on the back of strong fixed income trading, following the trend set by JPMorgan and Goldman Sachs earlier this week. The large wealth management division and investment management also produced strong results for the quarter. Meanwhile, financial service bellwether Charles Schwab missed earnings estimates but its shares rallied 4.1% nonetheless as its shift to zero trading fees attracted a wave of new account openings. Rail giant CSX, which released its results after the closing bell, topped earnings forecasts despite missing sales projections, sending its stock 2.3% higher in pre-market trading. This first busy week of 4Q earnings season closes today with Citizens Bank, Fastenal, and State Street among the major companies reporting. Next week features reports from Capital One, Haliburton, Netflix, United Airlines, Johnson & Johnson, Las Vegas Sands, Northern Trust, Progressive, American Airlines, Freeport McMoRan, Discover, Intel, Southwest, M&T Bank, Proctor & Gamble, Starbucks, Travelers and American Express.

          Additional Themes

US Trade Resolutions – A day after President Trump and Vice Premier Liu signed the Phase One US-China trade deal, the Senate yesterday approved the US-Mexico-Canada trade deal, the successor agreement to NAFTA. President Trump is expected to sign the bill shortly. After nearly two years of drama and brinksmanship around US trade policy, investors expect this issue to be on the backburner until the election. Specifically, the US-China Phase Two trade deal negotiations are deemed unlikely to show meaningful progress and no major imposition of tariffs on Chinese goods, EU autos, or other market-impactful products are anticipated.

 Looking Ahead – In addition to continuing corporate earnings reports, next week’s calendar will include January manufacturing sector purchasing managers’ indexes in the US and EU as well as a closely-followed economic sentiment gauge for Germany. The European Central Bank and Bank of Canada both have meetings next week but neither is expected to make policy changes.

Summary and Price Action Rundown

Global risk assets are rallying this morning amid positive atmospherics surrounding the completed Phase One US-China trade deal, while investors parse key economic data and US corporate earnings reports. S&P 500 futures point to a 0.3% gain at the open, which would send the index to a fresh record high for the second consecutive session. US equities have been buoyant this month even as analysts note a lack of positive surprises in the Phase One US-China trade deal terms, some mixed earnings reports, elevated geopolitical tensions, and uneven global economic readings. Overnight, equities in Asia and the EU were directionless despite better-than-anticipated Chinese credit figures (more below). Treasury yields and the dollar are flat, hovering within their recent ranges, as traders await key US retail sales data later this morning. Crude oil is flat as prices continue to fluctuate near one-month lows.

Nuanced Market Reaction to Phase One US-China Trade Deal Completion

Global risk assets have been mixed as the positive atmospherics of the Phase One trade deal signing were offset by a lower-than-expected degree of tariff relief and some lingering ambiguities in the agreement. The long-awaited Phase One US-China trade deal was signed yesterday at the White House by President Trump, who called it a “monster” deal, and Chinese Vice Premier Liu, who stated that Beijing is “full of confidence” in the positive impact of the accord. Notwithstanding these optimistic official assessments, analysts are noting few positive or negative surprises. China’s pledge to import more US goods, which was Beijing’s central concession for this stage of the trade deal, was roughly as expected, but soybean, corn, and cotton futures are retreating for a second day amid less clarity than anticipated on purchase quotas. Analysts are also focused on the target of $50 billion in US energy purchases over two years. Commitments to avoid competitive currency devaluation were noted, with some verbiage on enforcement that suggests scant difference from the status quo. The renminbi was up 0.2% versus the dollar overnight, extending its gains from September’s low to 4.2% and reaching a five-month high. Meanwhile, the language on intellectual property protections and tech transfer lacked specifics and the continuation of US tariffs of 25% on $250 billion and 7.5% on $120 billion of Chinese imports for a 10-month window was viewed as a disappointment. Although President Trump indicated that these tariffs would be removed as part of the next stage of negotiations, which Vice President Pence said have already begun, analysts expect no progress toward a Phase Two deal before the US election in November.

 Equities Remain Upbeat Amid Mixed Corporate Earnings and News

Although the S&P 500 climbed to another record yesterday, price action at the sectoral level was disparate after some uneven fourth quarter (4Q19) corporate results. Shares of UnitedHealth Group jumped 2.5% after the health care coverage company reported 4Q19 profit that beat expectations although revenue missed estimates. Goldman Sachs’ stock price fluctuated but closed slightly lower after handily beating consensus earnings expectations but posting a litigation charge of $1.1 billion. Bank of America, meanwhile, fell 1.8% despite better than expected earnings as investors focused on lower expected net interest margins in 2020 due to 2019 Fed rate cuts. Finally, shares of Blackrock, the largest asset manager in the world, closed 2.3% higher after reporting strong results and robust flows into its exchange-traded funds (ETFs). Shares of big box retailer Target fell 6.6% after the company reported disappointing holiday sales numbers, which also weighed on shares of its retailing peers. This downbeat disclosure precedes today’s US December retail sales figures (more below). Today’s high-profile earnings releases include Blackstone, CSX, and Morgan Stanley. And the week closes tomorrow with Citizens Bank, Fastenal, and State Street.

          Additional Themes

Solid Chinese Credit Data – China’s total aggregate financing for December, which is the most comprehensive measure of credit extension that Beijing publishes, posted a significant upside surprise, suggesting that authorities are seeking to facilitate another credit-fueled growth rebound for the stuttering mainland economy. However, the more important subsector of new bank loans was slightly below estimates. This comes ahead of tonight’s release of 4Q GDP, which is expected to be steady at 6.0%, and retail sales, industrial production, and fixed asset investment figures for December, which are expected to show broad stability.

 US Retail Sales Data Due – December’s retail sales figures are forecast to feature a reacceleration of the headline rate to 0.3% month-on-month (m/m) from 0.2% in November, while the core metric, which strips out auto and gasoline sales, is projected to rebound to 0.4% m/m from 0% in November. Although Target’s downgraded holiday sales numbers could bode ill for retail, analysts note that this disappointment could reflect the shift to online purchasing rather than overall consumer weakness.

Summary and Price Action Rundown

Global risk assets were mostly lower overnight after yesterday’s headlines dampened enthusiasm over the Phase One US-China trade deal, while investors continue to monitor US corporate earnings reports. S&P 500 futures indicate a flat open, which would retain the index’s modest decline yesterday from Monday’s record high. Overnight, equities in Asia and the EU were broadly subdued amid shifting expectations for US tariff reduction (more below). Treasury yields are lower but remain in their recent range ahead of tomorrow’s key US retail sales data, while the dollar is flat. Oil prices are slightly higher this morning as investors follow headlines from the ongoing conflict in Libya and await US inventory data. For context, crude prices are now trading below the levels that preceded the rising US-Iran tensions.

Earning Reporting Off to a Positive Start

Yesterday, US stocks rallied prior to the US-China tariff headlines as mostly solid corporate reports kicked off a potentially consequential set of fourth quarter (4Q) corporate results. Shares of JPMorgan Chase closed 1.0% higher after the bank reported fourth quarter (4Q19) profits and revenue that handily beat markets expectations on the back of strong trading revenue. Profits rose 21% to $8.52 billion, which equates to $2.57 per share, while analysts were expecting $2.35. Citigroup shares also rallied, climbing 1.6% after reporting earnings of $1.90 per share compared to $1.84 expected. The bank earned $18.38 billion on the back of strong fixed income trading that was almost double what analysts expected and 49% higher than 4Q18. However, shares of Wells Fargo traded down 5.4% after the bank reported disappointing earnings after newly appointed CEO Charles Scharf set aside another $1.5 billion for ongoing legal costs related to the bank’s fake-account sales scandal while also promising “fundamental changes”. Revenue of $2.87 billion came in well below the $6.06 billion earned a year earlier, while earnings per share of 60 cents missed analysts’ expectations of $1.12. Today’s packed earnings calendar features reports from Bank of America, Blackrock, Goldman Sachs, Charles Schwab, and United Healthcare. Thursday’s focus will be on Blackstone, CSX, and Morgan Stanley. And the week closes with Citizens Bank, Fastenal, and State Street. Last year, better-than-expected earnings provided a key upside catalyst to US equities despite modest year-on-year (y/y) earnings declines in the past three quarters and consensus expectations for another contraction in 4Q at a rate of -2.0% y/y.

 US-China Trade News Dampens Deal Optimism

US stocks surrendered gains in midday trading yesterday and remain subdued following headlines indicating that the Phase One trade deal will provide less tariff relief than investors had hoped. News that US tariffs of 25% on $250 billion and 7.5% on $120 billion of Chinese imports will be kept in place for a 10-month window for commitment enforcement knocked US equities from their highs of the day into negative territory and continue to exert a headwind on sentiment this morning. The final terms of the US-China Phase One trade deal have not been made public even though the signing ceremony is set for today. Despite the diminished expectations for the US and China to further unwind their tariffs, the renminbi is steady versus the dollar this morning, holding its recent gains at its strongest level since last August after having gained 4.0% over four months. Going forward, analysts expect no progress on a Phase Two deal before the US election in November. Meanwhile, China’s December trade figures picked up, with exports and imports rising to 7.6% y/y and 16.3% y/y, respectively, from -1.3% and 0.8% the prior month. Other key Chinese December data is due this week, including credit extension figures, retail sales, industrial production, and fixed asset investment.

          Additional Themes

Weak Economic Data Overseas – German bonds are rallying but the euro is stable versus the dollar after Germany’s 2019 GDP reading matched estimates of a dismal 0.6% y/y rate, down from 1.5% the prior year. This is the slowest pace since 2013 and the consensus outlook is for only a slight improvement in 2020 to 0.7% GDP growth. Meanwhile, UK consumer price inflation unexpectedly stagnated in December. This data has further lifted futures-implied odds of a Bank of England rate cut at the next meeting on January 30^th to nearly 65%. However, the pound is steady versus the dollar, having already lost 2.4% over the past month.

 Softening US Inflation Data – The Consumer Price Index (CPI), a key gauge of US inflation, increased 0.2% month-on-month (m/m) in December, slightly below market forecasts of 0.3%. This puts the CPI up 2.3% year-on-year (y/y), up from 2.1% in November and in line with consensus. Core CPI, which excludes volatile items such as food and energy, increased 0.1% m/m, missing market expectations of a 0.2% rise. On an annual basis, Core CPI was up 2.3%, in line with market forecasts. These slight downside surprises depressed Treasury yields. Producer price inflation figures for December are due today, with expectations for muted pressures.

Summary and Price Action Rundown

Global risk assets were mixed overnight with investors closely monitoring today’s unofficial start to US corporate earnings reporting season. S&P 500 futures point to a 0.1% decline at the open, which would keep the index close to yesterday’s latest record high. Overnight, equities in Asia and the EU lacked direction, as analysts will look to today’s results from major US banks and other companies for positive or negative cues. Treasury yields are hovering in their recent range ahead of today’s US inflation data, while the dollar is edging to the stronger side. Oil prices are turning higher this morning as investors follow headlines from the ongoing conflict in Libya, which has maintained relatively steady production levels despite the unfolding civil war. Nevertheless, international benchmark Brent crude and US benchmark WTI remain below the levels that preceded the intensification of US-Iran tensions earlier this month.

Equities Fluctuate Ahead of Key Earnings Reports

US stocks turned higher again yesterday but are pausing this morning as analysts await a potentially consequential set of fourth quarter (4Q) corporate results. This morning, peak 4Q corporate earnings reporting season begins with a heavy dose of US bank results. Today, analysts will see how the year ended for Citi, JPMorgan and Wells Fargo. Wednesday’s packed calendar features reports from Bank of America, Blackrock, Goldman Sachs, Charles Schwab, and United Healthcare. Thursday’s focus will be on Blackstone, CSX, and Morgan Stanley. And the week closes with Citizens Bank, Fastenal, and State Street. Last year, better-than-expected earnings provided a key upside catalyst to US equities despite modest year-on-year (y/y) earnings declines in the past three quarters. Overall S&P 500 company profits are expected to register another contraction in 4Q over last year at -2.0% y/y. Meanwhile, top-line revenue is forecast to expand 2.6% y/y last quarter, which would be the slowest pace of expansion since 2Q 2016. These tepid figures have not dampened investor enthusiasm for US stocks, however, given the expectation that companies have likely provided overly downbeat guidance in a repeat of recent quarters that featured high rates of upside surprises. Also, earnings growth is expected to rebound to around 4.5-6.5% y/y in the first half of 2020, and then improve even further thereafter, which suggests that the bar will be raised for companies to impress analysts.

 More US-China Conciliation in Advance of the Phase One Deal Signing

Yesterday’s news that the US Treasury rescinded its designation of China as a currency manipulator further boosted investor hopes of a thaw in the world’s most important economic relationship. The long-awaited Treasury foreign exchange report, which was delayed beyond its usual fourth quarter publishing timeframe presumably due to ongoing negotiations with China, was released yesterday and labeled no countries as currency manipulators. For context, China’s brief designation as a currency manipulator was announced in August, not as part of the official report but in response to abrupt renminbi weakness after President Trump announced a new round of tariff threats. In the press release accompanying the Treasury’s report, Secretary Mnuchin is quoted as stating that “China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability,” though official terms of the Phase One trade deal have not yet been made public. This came ahead of the arrival of a Chinese delegation led by Vice Premier Liu in Washington for the scheduled signing ceremony of the Phase One trade deal tomorrow. The renminbi has gained 0.5% versus the dollar since the news of this move by the Treasury and is at its strongest level since last August, having appreciated 4.0% over four months. Going forward, analysts expect that no progress will be made on a Phase Two deal before the US election in November. Meanwhile, China’s December trade figures picked up, with exports and imports rising to 7.6% y/y and 16.3% y/y, respectively, from -1.3% and 0.8% the prior month.

          Additional Themes

US Inflation Data – Today’s reading of December consumer prices (CPI) is expected to accelerate to 2.4% y/y from 2.1%, with a steady 2.3% y/y for core CPI. The Fed targets 2% inflation, but it prefers to use a different metric than CPI, instead focusing on the core personal consumption expenditure (PCE) price index. Core PCE is currently 1.6% and in the past five years has only topped 2% for a few months in the middle of 2018 and in early 2012. Futures markets continue to reflect a meaningful likelihood of another rate cut over the coming year.

 BlackRock Focuses on Climate Change – CEO Fink of the mega-asset manager has stated in his annual letter to US corporate executives that his firm will be increasingly focused on climate-related issues in its investment decisions and engagement with companies. He characterizes this initiative as a “fundamental reshaping of finance” as the industry struggles to factor in the uncertain but potentially dramatic medium to longer-term impact of climate issues and sustainability into their traditional valuation metrics.

Summary and Price Action Rundown

Global risk assets were mixed overnight but US equity futures are higher as investors shift their attention from Friday’s decent jobs report to US corporate earnings and retail sales data this week. S&P 500 futures indicate a 0.3% gain at the open, which would retrace Friday’s moderate losses to send the index back toward Thursday’s record high. Overnight, equities in Asia were generally higher but EU stocks are turning mixed as investors search for positive cues. Treasury yields and the dollar are both retracing most of their post-nonfarm payroll downside and continue to trade within recent multi-month ranges (more below). Oil prices are pausing after having been whipsawed by the waxing and waning geopolitical risks this month, with Brent crude dipping below $65 per barrel after spiking to nearly $72 during the initial reports of Iranian missile attacks on US targets in Iraq last Tuesday night.

Markets Look Past Mixed US Jobs Report

The gentle declines in US Treasury yields, equities, and the dollar that followed Friday’s modest downside surprise in December nonfarm payrolls have reversed as investors shift their focus to retail sales and other key US data this week. Nonfarm payrolls increased 145k in December, missing market expectations of 164k and descending from a downwardly revised 256k gain in November. Notable job gains occurred in retail trade, which added 41k jobs, though this could be due to a later-than-normal Thanksgiving in 2019. The unemployment rate held steady at 3.5%, the lowest level since 1969, and the labor force participation rate was unchanged at 63.2. Average hourly earnings (AHE) rose 0.1%, to $28.32, after an upwardly revised 0.3% gain in November, missing market estimates of a 0.3% gain. Year-on-year, AHE increased 2.9%, easing from a 3.1% gain in November and below market expectations of a 3.1% gain. While Friday’s market reaction was consistent with the slightly softer tone of the report, the moves have proven fleeting as Treasury yields, the dollar, and S&P 500 futures are moving higher again this morning ahead of more economic data this week, with December retail sales in the spotlight. The strength of the US consumer is expected to be on display in last month’s retail figures, with the core figure (excluding autos and gasoline) forecast to rise 0.5% month-on-month versus a flat reading for November.

 Corporate Earnings Reports Awaited

US equities are rising ahead of a potentially consequential set of fourth quarter (4Q) corporate results, with reporting beginning in earnest tomorrow. This week, peak 4Q corporate earnings reporting season begins with a heavy dose of US bank results. On Tuesday analysts will see how the year ended for Citi, JPMorgan and Wells Fargo. Wednesday’s packed calendar features reports from Bank of America, Blackrock, Goldman Sachs, PNC, Charles Schwab, United Healthcare, and US Bank. The focus on Thursday will be on Blackstone, CSX, and Morgan Stanley. And the week closes with Citizens Bank, Fastenal, Regions Financial, and State Street. Last year, better-than-expected earnings provided a key upside catalyst to US equities despite modest year-on-year (y/y) earnings declines in the past three quarters. Overall S&P 500 company profits are expected to register another contraction in 4Q over last year at -2.0% y/y. Meanwhile, top-line revenue is expected to expand 2.6% y/y last quarter, which would be the slowest pace of expansion since 2Q 2016. These tepid figures have not dampened investor enthusiasm, however, given the expectation that companies have likely provided overly downbeat guidance in order to lower the bar to beat analysts’ estimates. Additionally, earnings growth is expected to rebound to around a 4.5-6.5% year-on-year rate in the first half of 2020.

          Additional Themes

Bank of England (BoE) Rate Cut Expectations Rise – The ongoing trend of monetary easing by major global central banks may soon include another rate cut by the BoE. Futures markets have moved sharply today to price in greater-than-50% odds of a 25 basis point reduction in the policy rate at the January 30^th meeting from 0.75% to 0.50%. This shift of the policy outlook is weighing on the pound, which is down 0.8% versus the dollar, extending its losses from its December peak to 2.7%. As the catalyst for the move, analysts are citing remarks by a key member of the BoE monetary policy committee to the Financial Times indicating that the bar for further easing is low and implying that action could be taken over the coming meetings.

 This Week – In addition to this week’s corporate earnings figures, analysts will monitor the ongoing geopolitical tensions in the Middle East as well as the expected culmination of months of US and Chinese trade negotiations. Chinese Vice Premier Liu has confirmed that he will be coming to Washington ahead of a signing ceremony of the Phase One trade deal on Wednesday, January 15^th. Regarding economic data, the calendar is heavy with December’s US retail sales, industrial production, and wholesale and consumer price inflation figures, as well as China’s 4Q GDP reading and key growth data for December.