In the Global Week Ahead, what should traders make of U.S. trade negotiators in Beijing and a Brexit showdown at the House of Commons?
In short, it’s “kick the can down the road” time for the U.S. and U.K. When one is led by delusional thinking, there can be no stomach for reality.
Psychology Today has keen insights into such folk—
“The Delusional Belief is something very important for those who hold them. That is why they are blind to counter-evidence because they do not want to change their belief.
“Delusional reasoning can be described by an over-reliance on instinctive (rapid and non-reflective) thinking and an under-reliance on analytical thinking (deliberative, effortful).”
On we must go. Now, let’s consult our neighbors to the North, for a keen perspective on politics in both the USA and the U.K. On these (analytical) excerpts, I am in agreement.
Here's how Canada’s Scotiabank put the U.S. China trade situation—
“The resumption of the US-China trade negotiations happens, as a top US delegation travels to Beijing on Wednesday and Thursday. Setting a date for a potentially decisive Trump-Xi summit could follow this. That date has been pushed out to sometime after March 1st when the US tariff moratorium expires.
“The most likely scenario is probably for the tariff deadline to be pushed out, in keeping with the observed experiences during NAFTA negotiations when the Trump administration was routinely—if not laughably—too aggressive with its deadlines given the complexity of the negotiations.
“In the end, the expedited timeline resulted in the Trump administration largely caving on its core early demands, leaving NAFTA 2.0 resembling much of NAFTA 1.0.”
Again, a Canadian view on Brexit—another time delay the likely outcome—
“Thursday’s Brexit vote may inform next steps on the path to otherwise crashing out of the EU on March 29th, but as yet they don’t know what they’ll be voting upon! That in itself may indicate that the vote could well be to delay the deadline if not revisit it altogether given the low likelihood of finding a workable solution to the Irish border.”
Let’s move on to Reuters in London’s five big world market themes. These likely dominate the thinking of investors and traders in the Global Week Ahead.
(1) Doves, Doves, Everywhere
It’s just over a week since the U.S. Federal Reserve formally paused its rate-rise campaign but central bankers around the world are falling over themselves to emulate Chair Jerome Powell’s dovish turn.
Australia’s Philip Lowe, having said for a year the next rate move was up, suddenly declared rates could go either way. The European Central Bank can hardly cut its minus 0.40 percent rate but a new round of bank funding stimulus is now widely expected.
The rate cycle has turned across emerging markets, too — India has cut rates for the first time in 18 months; several others including Brazil have hinted at cuts ahead. And upcoming central bank meetings in New Zealand and Sweden are sure to highlight growth concerns.
The shift is showing up on currency markets. The dollar fell in December and January as the Fed pause was priced in. Now it’s everyone else’s turn: the Aussie has lost more than 2 percent since Lowe’s Feb 6 comments; the euro has had its biggest weekly drop in four months and MSCI’s emerging currency index is retreating after rising three months straight. If everyone joins the Fed in the doves camp, the greenback, with the highest interest rates in the G10 group, may resume its ascent. Analysts reckon it has stalled, but only time will tell.
(2) Less than 50 Days to Brexit
Less than 50 days before Britain’s EU departure date, markets’ conviction that a no-deal Brexit will be avoided may be starting to fade.
There is not that much Prime Minister Theresa May can update UK lawmakers on when she addresses them on Feb. 13. This will be followed by debate in parliament where lawmakers can propose changes, known as amendments.
There are signs that going into that session, currency traders are ramping up their cautious bets on the pound.
Shorter-dated risk reversals, ratios of calls to puts on the pound, indicate investors are now more inclined to buy options to protect against a deeper fall in the pound versus the dollar, rather than anticipate big gains.
That demand for puts has also put a floor under implied volatility, a gauge of expected swings in the currency and a key input to option prices. One-month and one-week implied vols, as they are known, have risen in the past week, after falling steadily in January.
That caution has rippled into cash markets. The pound has fallen back below a key technical market level — the 200-day moving average, an indication investors are no longer bullish on the currency’s prospects. In fact, sterling has traded below that average since May 2018, only briefly popping above that in January.
(3) Hard Data on China Trade Out on Thursday
As Chinese markets reopen after the Lunar New Year, they may get more hard evidence on the damage done by the Sino-U.S. trade war.
Data on Thursday is expected to show exports as well as imports contracting, with the latter taking an extra punch from slowing domestic demand.
If March 1 passes without a trade agreement with Washington, Chinese exports to the United States will be subject to additional tariffs. So hopes are pinned on the U.S. trade delegation, which travels to Beijing on Monday, led by Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. But President Donald Trump has somewhat dampened hopes of a breakthrough, saying he had no plans to meet Chinese President Xi Jinping in the coming month.
If talks collapse and tariffs increase on March 2, it will spell more pain for China’s economy — and the rest of the world. In turn it will increase pressure on Chinese policymakers to ramp up stimulus at next month’s parliamentary summit.
(4) A Recession in Europe?
For months, the question on a lot of people’s lips has been whether the U.S. economy is headed for recession, but it looks like the Eurozone could get there first.
The European Commission shocked markets by slashing growth and inflation forecasts for the bloc. Thursday’s release of the “flash” GDP data is likely to show the region grew 0.2 percent in Q4. Evidence is already piling up that Germany, the bloc’s largest economy, was teetering on the brink of recession towards the end of 2018 due to global trade headwinds and a cooling Chinese economy.
The picture beneath may be even less rosy. German industrial output has fallen for four months straight, reinforcing expectations the economy actually contracted in Q4. That would translate into a recession after GDP fell in the third quarter.
Markets have taken notice. German 10-year bond yields now are just 10 basis points away from zero percent — territory that in bond markets reflects dire concern about economic conditions.
(5) What Did the U.S. Shutdown Cost?
Clouds are gathering on the horizon for the world’s top economy — global growth headwinds and the trade war are taking a toll while another government shutdown may be lurking around the corner.
Markets will be scouring various U.S. consumer and producer inflation data out in the coming days to see just how accommodative the Federal Reserve can be after Chairman Powell said in January the case for raising rates had “weakened.” The Fed’s post-meeting statement had also dropped its earlier expectation for “some further” tightening.
Latest jobs data showed workers’ wage gains dipped slightly on a year-over-year basis, pointing to further reprieve from rate-hike concerns.
The U.S. government has also endured a 35-day government shutdown that ended on Jan. 25, cost the economy at least $3 billion and inflicted hardship on unpaid workers. Lawmakers are resisting President Trump’s demand for funds to build a Mexican border wall. They have until Feb. 15 to find a compromise.
Top Zacks Stocks—
Unilever (UN - Free Report) : With the Eurozone possibly heading into a recession, there should be no surprise this marquee Staples stock is a Zacks VGM score of A.
The Zacks #1 Rank makes it tastier. But only for long-term investors, given the risk-off tone for broad European indexes at the moment.
Rio Tinto (RIO - Free Report) : Don’t forget about the surge in iron ore prices, due to the Vale dam collapse. This is an Australian company with a Zacks VGM score of A and a Zacks #1 Rank.
Iron ore stocks like this have been surging on that news.
Celgene (CELG - Free Report) : It’s going to get bought by Bristol Myers. But that didn’t stop this Zacks VGM score of A and a Zacks #1 Rank stock from making it on my list.
Key Global Macro—
There are plenty of Fed speakers all week long.
On Wednesday, the Theresa May speech on Brexit at the House of Commons is surely a headline-making event.
On Thursday, the China trade data is the focus. It’s another headline worthy moment.
On Monday, U.K. quarterly GDP data comes out. It could fall to +0.2% q/q from +0.6%, as Brexit closes in.
On Tuesday, the U.S. NFIB Small Business Optimism index should go from 104.4 to 102. Still high, but tempering.
On Wednesday, Theresa May is to update the House of Commons on Brexit. Should be a doozy.
Eurozone industrial production is out. The prior reading was -3.3 y/y. That is a negative sign, folks.
On Thursday, China exports and imports data hits. The -3.4% on exports y/y and -6.6% y/y on imports is not a set of tidy facts.
Eurozone GDP data comes out. The prior reading is at +1.2% y/y.
U.S. initial claims are at 234K. That’s decent.
On Friday, the University of Michigan sentiment index is out. The prior reading at 91.2 is OK.