A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web
Surprisingly weak economic data from China and Europe have equities across the globe lower Monday,
“China’s rapid development and 1.4bn consumers have helped it to account for about 30 per cent of worldwide growth for the past decade even as its domestic expansion has slowed … Chinese automotive sales fell for the first time in 28 years in 2018, official data are expected to show, after tax breaks expired early in the year. “The willingness to buy big-ticket items such as cars has come down substantially,” said Louis Kuijs, head of Asia for Oxford Economics… It is one of many warnings that the Chinese consumer can no longer be counted on to drive global sales for multinationals struggling with lacklustre demand in their home markets.”
Domestic equity markets are highly exposed to global growth through commodity prices.
“Clouds loom over global business as Chinese economy falters” – Financial Times (paywall)
“China’s exports shrink most in 2 years, raising risks to global economy” – Report on Business
“Confirmed signs of easing growth momentum in most major economies” – OECD.org
“Germany leads sharp fall in eurozone industrial production” – Financial Times (paywall)
“@jsblokland Not so good #trade morning! #China's exports declined 4.4% YoY (in USD) in December. Imports fell 7.6% YoY, the first decline since October 2016” – (chart) Twitter
Bank of Montreal economists have not cut, only delayed, their forecasts for Bank of Canada rate cuts after noting that the central bank is now more concerned about domestic housing prices and consumer debt,
“persistent softness in the housing market has increased concern at the BoC. Indeed, debt service ratios have risen close to their prior peak (hit in 2007Q4), suggesting that households are under increasing pressure from rising interest rates. Fortunately, the huge rally in Government of Canada bonds over the past couple of months should limit any further increases in mortgage rates .. Meantime, we’ll get the final home sales figures for 2018 this week and they aren’t likely to be pretty … The sharp downgrade in the BoC’s outlook and generally more cautious tone have prompted a modest change to our rate forecast. We continue to see two rate hikes this year, but have pushed back the timing to July and December (from April and October previously)”
“@SBarlow_ROB BMO: “persistent softness in the housing market has increased concern at the BoC” - (research excerpt) Twitter
For investors, nothing matters more than U.S. earnings seasons in the next few weeks.
Global economic data has markets concerned about the end of the bull market, as noted above, but these fears could be assuaged by a decent quarter of profits. Earnings estimates have already been slashed dramatically, so negative surprises would likely cause significant selling pressure,
“Analysts became increasingly pessimistic as earnings approached, issuing a slew of cuts to ratings and price targets earlier this month. As of Friday midday, they’d trimmed estimates for earnings per share this fourth quarter [for U.S. banks] by the most for any year-end quarter since 2016, according to data compiled by Bloomberg, with Goldman Sachs Group Inc. the hardest hit among the six biggest banks…
“Citigroup Gets a Turn to Lead Bank Stocks Into Earnings Season” – Bloomberg
I don’t have room here to break this Morgan Stanley report on the effects of monetary policy on risk assets like equities down, but even if it’s very technical it’s also really important and I may have to in a future column. The key is noting that stocks are ultra-long duration assets because there’s no point in time when investors get their principle back.
Morgan Stanley’s report argues that central banks are to blame equity market volatility,
“The Fed is implementing QE with a much higher policy rate. The higher policy rate has led to higher demand for shorter-duration assets, relative to longer-duration assets, just as the Fed is reducing their supply. This should drive the prices of longer-duration assets lower.
In short, the implementation of QE in a period with near-zero interest rates both encouraged and incentivized private investors to increase investment risk. As a result, private sector balance sheets became riskier during the QE era. Now, with QT in a period of rising rates, the Fed is encouraging and incentivizing private sector balance sheets to de-risk.”
“@SBarlow_ROB MS: “with QT in a period of rising rates, the Fed is encouraging and incentivizing private sector balance sheets to de-risk” – (research excerpt) Twitter
Tweet of the Day:
2019 S&P 500 earnings expectations nosedive. pic.twitter.com/ESqsyCjk62— Daniel Lacalle (@dlacalle_IA) January 13, 2019
Diversion: “Photographing storms from the best seat in the sky” – CNN