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.
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.