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Q4 Earnings Season Kicks Off: Global Week Ahead

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The Q4 2018 earnings season kicks off.

Earnings reports dominate as a risk source for all global stock markets for the next several weeks.

Thirty-four S&P 500 firms release earnings over the coming week. Twenty-two of them will be financials, which is typical of the early stages of every season.

On Monday, Citigroup kicks it off.

Other big bank names: JP Morgan Chase, Wells Fargo, US Bancorp, BlackRock, BoNYMellon, BofA, PNC Financial, Goldman Sachs, Morgan Stanley, Amex and State Street.

Non-financial tech names start off slowly but include Micron and Netflix.

Next, I put up Reuters’ five big world market themes.

The four themes not related to earnings supplement Q4 S&P 500 earnings reports as major catalysts. They are not secondary, given Brexit headline strength this week.

These will contribute to the thinking of investors and traders outside the USA in the coming Global Week Ahead.

(1) On Tuesday, U.K. Lawmakers Vote on Brexit

With fewer than 80 days to go until Britain leaves the European Union, the path to Brexit winds to a critical crossroads on Tuesday when lawmakers vote on Prime Minister Theresa May’s withdrawal deal.

The agreement, which May and EU leaders say cannot be renegotiated and is the only one available, will almost certainly be rejected. If so, uncertainty, paralysis and the likelihood of a disorderly ‘no deal’ Brexit will rise.

Volatility is nothing new to sterling, Friday being a microcosm of how the FX market is playing Brexit. A media report that Britain’s departure could be delayed sent the pound shooting up nearly a cent to its highest since Nov. 29, then minutes later May’s spokeswoman ruled out any delay and the pound fell right back again.

One-month implied options volatility in sterling is much higher than euro volatility, and that’s unlikely to change any time soon. All eyes on the big vote in Parliament on Tuesday and for sterling, moves below $1.25 or above $1.30 are both on the table.

(2) Is There a Powell ‘Put’?

The Fed reckons the world’s biggest economy is continuing to motor ahead but markets seem to think otherwise, their fears for growth outlook knocking equity prices off record highs.

More recently, though, they have cheered Fed Chairman Jerome Powell’s comment that the U.S. central bank can be patient in approving any further rate increases. Powell said that “especially with inflation low and under control,” the Fed can “be patient and watch patiently” to figure out which of the two competing narratives unfolds in 2019.

So whose view is correct? It’s true labor markets are robust and wage inflation has been on the rise — average earnings rose in December by 3.2 percent on an annual basis, matching October’s rise, which was a 9 1/2-year high. But workers’ wage gains are also being eroded by inflation, with core CPI seen above the Fed’s 2 percent target in coming months.

Powell’s newly dovish-sounding rhetoric has prompted money markets to price out Fed rate rises in 2019, but the Producer Price Index (PPI) due Jan 15th could be key. If it shows inflationary pressures cooling, there could be a further reprieve from markets’ rate-hike concerns.

(3) Quarterly Earnings Reports Start Up: Banks First

Global stock markets have suffered in recent weeks on fears that economic growth — and company earnings — are on the decline.

Upcoming U.S. company earnings will test this view.

Big U.S. hitters due to issue Q4 results next week include Micron Technology, Netflix and major Wall Street banks Citi, JPMorgan and Wells Fargo.

Money has started trickling back into equity funds lately thanks to Powell’s dovish comments.

But earnings expectations remain low nevertheless: I/B/E/S Refinitive data indicates S&P 500 earnings will have grown 14.5 percent in the fourth quarter of 2018, the slowest since Q3 2017, sharply lower than the 28.4 percent rise in Q3 2018 and almost flat year-on-year.

And confidence in Europe is even lower — earnings-per-share (EPS) for STOXX 600 companies is expected to have grown 7.1 percent in Q4, half the levels seen in Q3 and Q4 2017. Forecasts as recently as November were for 14 percent growth, but a spate of nasty macro-economic surprises has caused analysts to downgrade their view.

Some strategists do reckon markets have got ahead of themselves by pricing in a growth slowdown or recession. Company results could show who’s getting it right.

(4) China’s Export Growth Data in Focus

China and the United States have held their first face-to-face talks since the two world powers agreed a 90-day trade war truce. Described as “extensive,” the talks have helped cheer up global equity investors.

But risk aversion could rear its head again should hard data from China show what damage has been done to the economy by the initial tariff rounds.

In particular, focus will be on Chinese export growth. Analysts expect that to have cooled for a second month in December, as front-loading of U.S.-bound cargoes faded. This was indeed the case on Monday.

Poor data is another incentive for Beijing to be more accommodative with fiscal and monetary policies. It has already engaged a reserve ratio cut for banks which should pump the equivalent of $115 billion into the economy.

What remains to be seen is how accommodative it might be with U.S. demands on trade.

(5) Turkey and South Africa in the Tank Already

Having just suffered its worst year in the best part of two decades, the Turkish lira has had a tumultuous start to 2019.

It’s weakened more than 2 percent year-to-date, and worse still, it experienced a flash crash on Jan. 3, which was a reminder of all its vulnerabilities: from geopolitics to upcoming elections and haphazard monetary policy.

On the positive side, the lira’s near-30 percent tumble in 2018 had got rebalancing off to a fast start; Turkey is now posting large current account surpluses and inflation, albeit high, is on the decline. But many worry that these very factors could tempt the central bank back onto the interest rate-cutting path.

On Wednesday, at its first meeting of 2019, the central bank is expected to stand pat, with 17 out of 19 economists seeing key rates steady at 24 percent. But two predicted a cut and the bank’s own survey finds that Turkish interest rates are seen falling almost 500 basis points in the coming year.

The picture is less dramatic in South Africa, which is seen leaving interest rates unchanged at 6.75 percent on Thursday, with rising inflation likely prompting a rate hike in May.

Top Zacks Stocks—

Surprisingly, HSBC Holdings (HSBC - Free Report) is on our #1 list this week. This is a huge $165B market cap global banking stock, with deep U.K. connections, and large exposure to China via Hong Kong.

However, the stock is off its $55 a share high seen in early January 2018 and is now pricing just above a late 2018 low under $40 a share. When addressing the sell-off in this stock, realize this: the VGM score is still poor at D, too.

Northrup Grumman (NOC - Free Report) is also on our #1 Zacks Rank list. The VGM score here is much more attractive at A, as the $45B market cap stock has sold off in the latest correction.

The Aerospace and Defense industry overall still looks attractive to covering analysts. It came in at #74 out of 265 on our latest Zacks Industry Rank list.

Hitachi (HTHIY - Free Report) climbed back onto our #1 Zacks Rank list. The VGM score for the Japan based multinational is A, too.
This $30B market cap stock is tied to a major diversified firm. The managers have just made a major acquisition.

Key Global Macro—

China trade data on Monday was indeed quite poor.

The coming week’s one marquee U.S. data report (the U.S. PPI) is put on hold by U.S. government dysfunction. The partial government shutdown sets a new all-time record for the longest in history.

On Monday, China’s exports declined -4.4% y/y, versus a prior reading of 5.4%. This was worse than the +0.6% y/y data that was expected. Futures went bright red after it happened.

As for China imports, they were worse too. The actual data was -7.6% y/y. The forecast was for +4.8% y/y growth.

On Tuesday, all eyes will be on the Brexit vote in the UK.
But there will be further important trade data out of Indonesia. They see +4.0% y/y export growth and +10.5% y/y import growth.

The U.S. PPI comes out. Ex-food and energy should rise about +0.1% m/m.

The ECB’s Draghi addresses the European Parliament.

On Wednesday, the Fed releases its Beige Book.

The BoE’s Carney testifies on Financial Stability Report, one day after the Brexit vote.

On Thursday, the BoJ’s Kuroda, Amamiya and Asa speak in Tokyo as chairs of the Group of 20.

U.S housing starts and building permit data come out. Permits look a little soft, at 1,27M versus a prior 1.328M. Winter has set in fully here.

U.S. initial claims for unemployment are very low. The last week’s data was 216K.

On Friday, University of Michigan sentiment comes out. The prior 98.3 reading looks good.

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