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New Earnings Season Opens: Global Week Ahead

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The dominant trader focus inside the Global Week Ahead will surely be the Q2 earnings season -- with the usual early focus upon Financials.

Key names are Citigroup, JP Morgan, Goldman Sachs, Wells Fargo, Bank of America, Morgan Stanley, eBay, Netflix, Microsoft, BlackRock, United and Amex.

Fifty-seven S&P 500 firms in total should release Q2 earnings.

Do not expect a robust U.S. earnings season. Consensus pegs a -2.0% y/y drop.

Any relative individual share performance always lies in terms of what is priced into shares via advance earnings guidance. Covering analysts often undercut company earnings estimates before the new quarterly reports hit the tape.  

In turn, on that count, earnings seasons in the U.S. almost always surprise higher.

Next, I show Reuters’ five world market themes for the Global Week Ahead. I put them in order of importance to equities.

(1) Q2 Earnings Reports Start for U.S. and European Firms

Investors are anxious to take the pulse of Wall Street and Europe Inc. to check if second-quarter results justify record U.S. stocks and Europe’s best first-half share performance in more than two decades.

Profit warnings from German blue chips BASF (BASFY - Free Report) and Daimler (DDAIF - Free Report) have hit confidence as the reporting season kicks off in earnest next week.

Expectations are already low, as analysts continue to take a red pen to their estimates.

With valuations stretched and lingering worries about the economic impact of protracted U.S.-China trade tensions, disappointing results could pour cold water on the rally.

  • U.S. earnings are seen contracting by -0.3% year-on-year — its weakest performance in three years, according to data compiled by I/B/E/S Refinitiv. That’s down from +1.6% growth in Q1.
  • Companies on Europe’s benchmark STOXX 600 will report growth of +0.8% for the quarter, data shows, an improvement from the -2% drop in Q1 but down from +1.8% growth expected just a week ago.

Full-year expectations are dimming as well:

  • Consensus based on the MSCI index pegs FY earnings growth for Europe at +4.1% - the lowest since 2016 and half the levels forecast at the start of the year.
  • For the United States, it is at +2.7% versus +7.5% in January.
     

Wall Street banks, including JP Morgan (JPM - Free Report) , will release results in coming days.

In Europe, the region’s most valuable technology company, SAP (SAP - Free Report) , Swiss drug maker Novartis (NOV - Free Report) and semiconductor company ASML (ASML - Free Report) are due to report.

(2) China’s Economy Shows Signs of Tariff Pressure

China’s economy and businesses are showing more visible signs of pain from the trade war, as recent data on producer prices and exports revealed. Monday’s GDP data, no matter how well-massaged, could show quarterly growth at its weakest in three decades and raise doubts over a government aim to keep 2019 growth in the 6-6.5% range.

Beijing’s monetary and fiscal stimulus has hitherto been a fraction of what it was during the 2015 downturn. The government is clearly wary of encouraging another property bubble and reckless rise in investment, both of which were targeted during the 2017 campaign to cut leverage.

But with worsening economic headlines, falling corporate investment and a looming Fed rate cut, the People’s Bank of China cannot merely be operating behind the scenes through local government spending and liquid money markets.

Many expect that a bold, symbolic statement about Beijing’s policy easing intent is needed — most certainly if the Fed also cuts at the end of July. Even though that may just involve the customary, token 10 basis-point cut in China’s benchmark one-year 4.35% policy rate.

(3) Tariff Heat Picks Up on Europe, Too

Just when you thought there may be a glimmer of hope on world trade as talks between Beijing and Washington resume — raising the possibility that the world’s top two economies could clinch a deal — the tariff heat switches to Europe.

On Thursday, French lawmakers approved a tax on big tech companies, potentially opening up a new front in a trade row between Washington and the European Union.

President Trump has ordered an investigation into the French tech tax plans, a probe that could lead to the U.S. imposing new tariffs or other trade restrictions.

And there’s already lots of shuttle diplomacy going on: German Economy Minister Peter Altmaier, after meetings in Washington on Thursday, predicted a 50-50 chance of averting U.S. auto tariffs and that it will take weeks or months to resolve at least some of the thorny trade disputes clouding U.S.-European relations. Never mind all the differences over issues such as aircraft subsidies, car imports and the Russian-led Nord Stream 2 gas pipeline.

Meanwhile U.S. Trade Rep Robert Lighthizer and Treasury Secretary Mnuchin are Beijing-bound in the very near future.

Markets worried over the impact of trade wars on the health of the global economy will be watching closely for progress and deterioration on all those trade war fronts in days to come.

(4) A July 17-18 Meeting of G7 Finance Ministers – Commemorating 75 Years of Bretton Woods

In July 1944 as World War Two raged, finance chiefs from the world’s main trading nations met in Bretton Woods, New Hampshire.

That agreement, signed July 22, was one of the first global monetary policy and currency agreements — re-establishing a gold standard for exchange rates, backing away from competitive devaluations and setting up the International Monetary Fund to bridge balance of payments gaps.

But as the Bretton Woods pact turns 75, that spirit of cooperation, whether on exchange rates or trade, is waning. Trade protectionism is on the rise, and nationalism and unilateralism is being championed by Trump, who says the rest of the world is stealing from the United States via competitive currency devaluations against the dollar.

And so the July 17-18 meeting of G7 finance ministers and central bankers in the French town of Chantilly could well be a fraught one. Taking place at the same time as IMF and World Bank heads join ECB officials in Paris to commemorate Bretton Woods, G7 discussions will focus less on the past and more on how to resolve pressing problems such as the world economy, Sino-U.S. trade tensions, fair exchange rates between the major economies, U.S. anger over France’s plan to tax tech firms such as Google, and Trump’s threat to slap levies on European autos.

Other issues on the table include tax havens, cyber security and Facebook’s proposed new coin Libra that has enlivened the debate about regulation of cryptocurrencies.

(5) The U.K. Pound Gets Battered and Battered

Losing support from monetary policy expectations, the already battered pound faces a tough week ahead. Key economic data such as earnings growth, inflation and retail sales will be closely watched by markets desperately trying to gauge where interest rates might be in a couple of years from now.

Markets have nearly priced in a Bank of England rate cut over the next 12 months after Governor Mark Carney signaled he could be about to join other central banks in cutting rates. Economists expect year-on-year inflation for June to come in at 2% on Wednesday. But if the reading falls below the central bank’s 2% target rate, chances of a rate cut may rise.

However, other data is expected to come in a touch stronger. Average weekly earnings are expected to rise on Tuesday by 3.2% year-on-year in the three months to May versus a 3.1% increase in April. Retail sales — due out on Thursday — are expected have risen by 2.5% year-on-year in June after a 2.3% increase in May.

Brexit, of course, remains the elephant in the room and is the main reason why sterling has fallen by 20% since June 2016, with the country gearing up to hear who the country’s next prime minister will be on July 23.

Top Zacks #1 Rank Stocks

(1) UnitedHealth Group (UNH - Free Report) : This is the granddaddy of HMO stocks, at $252B in market cap. The fresh Zacks #1 Rank here comes with a B for Zacks Value and a B for Zacks Growth. Now may be a great time to scoop up some shares for the next run higher.

(2) Lockheed Martin (LMT - Free Report) : This is a big, big defense stock. The market cap of $104B is delivered by a high $370 share price. That gives the stock a C for Zacks Value. Yet defense worries are climbing with Iran. Bet on more upside here.

(3) BHP Billiton (BHP - Free Report) : This is a $91B market cap mining company based in Australia. Iron ore prices are staying high and covering analysts are, in turn, getting more and more bullish on this stock. The A for Zacks Value and B for Growth are also attractive. 

Global Macro & Central Bank Events

As to macro data catalysts this week, keep a focus upon U.S. retail sales and a series of U.S. housing industry reports.

Fed Chair Jay Powell speaks in France on Tuesday. We have some central bank decisions for Asia on Wednesday.

On Monday, the NY Fed’s Empire manufacturing gauge kicks off another month’s round of regional measures. The latest was a poor -8.6 reading. Consensus looks for 2.0 this time around.

On Tuesday, look for U.S. retail sales for June and U.S. industrial output during the same month.

U.S. retail sales may struggle to stay on the positive side of the ledger. The latest m/m reading was up +0.5%, but this month, ex-auto retail sales looks to be lower at +0.1%.

Auto sales were flat in June, but at a reasonably elevated level of 17.3 million units.

Gas prices were lower by about 5% m/m and carry about an 8% weight. That could knock a few tenths off month-ago growth in total retail sales.

Fed Chair Powell speaks again at a Banque de France event in Paris, and his speech is titled “Aspects of Monetary Policy in the Post-Crisis Era.”

Germany and the Eurozone update ZEW investor confidence for July. German ZEW economic sentiment has been -21.1, and the current situation is at a stronger 7.8. The Eurozone is showing similar marks.

The Eurozone trade surplus in May could make headlines, given expectations it widened due to trade tensions.

On Wednesday, the Philly Fed regional manufacturing gauge lands. Consenus has a better 5.0 this month, up from 0.3 last month.

U.S. Housing starts for June land. We saw 1269K starts in the previous month. This time could be similar at 1260K. It’s summer.

Expect Bank Indonesia to cut its reverse repo rate by 25 bps to 5.75% from 6.00%.

Consensus is evenly divided between a hold and a 25 bps cut for the Bank of Korea, out on Wednesday night. 1.75% was the latest policy rate. 1.63% is the new consensus.

On Thursday, the Banco Central de Chile might be done surprising markets for a while. It delivers a new decision.

The U.S. leading indicators index comes out. Look for a modest pop up on +0.1% m/m, given the stronger stocks markets and good jobs figures.

On Friday, the University of Michigan consumer sentiment in July rounds out the release schedule. 98.2 last month should get to 98.6.

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