BEGINNING OF THE END OR...
Britain may be about to draw a line under almost 3-1/2 years of political chaos, economic uncertainty and tortuous discussions with the European Union over the terms of its exit from the bloc. If the UK parliament gives its nod to the divorce deal Prime Minister Johnson has secured — unlikely but possible — we might well see sterling rally more than 5%; shares in domestic-focused British companies might rocket to record highs.
Markets will be less euphoric if Johnson has to request an extension to the Oct. 31 Brexit deadline; it means three more months of Brexit noise, with a bitterly fought election likely thrown in. But with no-deal Brexit risks fading, the pullback may not be too drastic. Depending on the election outcome, Britain will either leave with Johnson’s deal or hold a second referendum that may cancel Brexit altogether.
But if the Brexit battle does end, another one may commence — the race to negotiate long-term trade deals with the rest of the world. Johnson or his successor may find that even more tough going.
“SUPER MARIO” LEAVES THE STAGE
Thursday could be an emotional day for Mario Draghi, the ECB chief credited with saving the euro and euro zone with his pledge in 2012 to do “whatever it takes”.
Big policy decisions are not anticipated at the European Central Bank’s meeting given the sweeping easing steps unveiled in September. Instead it will largely be a goodbye to Draghi — whose eight-year term as president ends on Oct. 31.
Dubbed ‘Super Mario’, Draghi has restored confidence in the ECB’s crisis-fighting ability and navigated the uncharted waters of quantitative easing (QE) — all in the face of fierce opposition from Germany and other conservative euro zone states.
Draghi might feel a slight sense of disappointment though: Inflation remains well below the ECB’s target of below but close to 2%, meaning he leaves office as the first ECB president to never raise interest rates. And the unprecedented stimulus implemented under his regime leaves his successor with little ammunition to combat another crisis.
Draghi may use his last meeting to urge governments to use fiscal policy more effectively to boost growth and inflation. He’s also likely to be pressed on the divisions within the ECB over restarting QE — but clearly healing that rift will be down to his successor, Christine Lagarde.
TIME FOR TECH
Third-quarter U.S. earnings season kicks into high gear in coming days — more than 130 S&P 500 companies and over one-third of the Dow industrials will be reporting results, according to IBES data from Refinitiv.
Reports flow in from many corners of Corporate America, from industrial bellwethers Boeing and Caterpillar to internet retailing titan Amazon.com. Biotech leaders Biogen and Gilead Sciences and carmaker Ford are among others to post results.
Investors have been bracing for gloom, but expectations have improved as early reports rolled in, and analysts now expect third-quarter earnings to fall by 2.9% from the prior year. That compares with a 3.2% drop expected a week ago, IBES data shows.
But the outlook doesn’t seem to have improved for information technology, a sector comprising more than one-fifth of the S&P500 index. Here, Refinitiv data indicates earnings could drop by nearly 8% from a year earlier.
Aside from Amazon, Microsoft, the largest company by value, as well as semiconductor stalwarts Intel and Texas Instruments will post earnings as will payments processor Visa.
EARNINGS IN EUROPE
Europe’s Q3 season too opens in earnest next week and is likely to again elicit unfavourable comparisons with corporate America. Since 2013, Wall Street has outperformed Europe’s STOXX 600 index, benefiting from stronger economic growth and the Trump administration turbocharging companies with massive tax cuts.
Europe Inc on the other hand seems to be stuck in corporate recession. Earnings across the STOXX 600 will likely fall for the third quarter straight, down by 3.7 percent year-on-year, according to Refinitiv data. But as U.S. tax cut effects fade, now might be a good time for Europe to catch up. Indeed, European earnings growth is seen overtaking the United States in 2020. But with powerhouse economy Germany teetering on the brink of recession and the manufacturing sector sunk in gloom, Europe’s come-back seems as elusive as ever.
There are some though, who believe a comeback is nigh if the Brexit issue is resolved, Germany agrees to some fiscal stimulus and economic gloom lifts a bit. Any sign of a rebound in next week’s corporate earnings flurry might lead portfolio managers to rethink exposure to the old continent.
Emerging market hotspots Turkey and Argentina are back in the limelight - and not necessarily for the right reasons.
Turkey’s central bank will announce its latest interest rate decision on Thursday. No doubt, with interest rates at 16.5% the general direction is down, thanks to easing inflation pressures and a leader who is a self-declared enemy of interest rates.
But the meeting comes at a time when the lira is facing fresh challenges from the country’s geopolitical roller coaster, moving currently at breakneck speed after Ankara’s much condemned military push into Syria on Oct. 9, which whacked its bonds and weighed on its currency.
Meanwhile Argentina’s government is getting ready to face the music as voters are heading to the poll on Sunday Oct 27. Incumbent Mauricio Macri - who suffered a surprise defeat in August primary elections - is trailing well behind Peronist Alberto Fernandez.
The August shocker has rattled Argentina’s debt and currency markets, driving the peso and bonds to record lows while investors fret about a shift back away from business-friendly Macri to populist-style policies.
Another debt restructuring is looming for the serial defaulter, and questions abound over the future of Buenos Aires’ programme with the International Monetary Fund. It’s time to get ready and see who may answer them.