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Say Goodbye to 2019: Global Week Ahead

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This is the last Global Week Ahead update for 2019.

The stock trading week includes a short Tuesday Christmas Eve session (the NYSE and Nasdaq are closing at 1 pm EST), and a full day Wednesday Xmas holiday, for both bond and stock markets.

If you plan on doing any tax-loss selling of any stock market losers from 2019 trading, this week will offer a final chance to do so.

In terms of global events, here is the Canadian Scotiabank FX teams’ latest line on U.S.-China trade talks:

Progress — or lack thereof — toward the formal text of a U.S.-China phase one trade deal may be further informed over the next two weeks.

Nothing formal is scheduled, but watch for tweets, China’s daily press briefings and media reports.

  • U.S. Trade Representative Robert Lighthizer has guided. The text of a full ‘Phase One’ agreement is complete. It will be released in early January and is simply being translated. But no date has been established for its signing.
  • Spokespersons for China’s Ministry of Commerce and Foreign Ministry have generally dodged questions about the terms of the deal and ongoing negotiations with ‘nothing to update’ references.

Key questions remain unanswered such as enforcement mechanisms and milestones toward full implementation.

Past alleged deals have fallen apart at the text and translation stage, with the U.S. accusing China of reneging on its verbal agreements and China demanding tariff reductions that appear to be rather modest in the sketched outline of the current proposals.

Next, I have London-based Reuters’ five world market themes, reordered for equity traders—

(1) The Fed is pumping billions into overnight lending markets (repos)

As end-December approaches, money market players’ thoughts may be turning to a September scare, when rates in the $2.2 trillion U.S. repurchase or repo market spiked to 10%, boosting the premium to borrow dollars.

The fear is a bigger crunch may erupt in the $2.2 trillion U.S. repo market towards year-end, a period when banks lend less and trading volumes fall.

Recent government bond sales and quarterly tax payments may have already sucked up to $100 billion out of the banking system. And coming days may see big lenders scaling back repo lending and reducing deposits at the Fed to comply with rules requiring them to show sufficient cash buffers.

Sure, the Fed is pumping tens of billions of dollars into overnight lending markets and buying $60 billion in Treasury bills every month to increase banking sector reserves.

But worries remain — the Fed’s repo operations, aimed at helping companies shore up cash levels, have seen heavy demand. A possible sign dealers are snapping up whatever cash they can to avoid year-end shortages.

(2) There is peace between the U.S. and China on trade, for now

Not peace maybe, but it looks like ‘detente,’ at least on the Sino-U.S. trade war front.

That’s driven Wall Street sprinting to record highs again; barring a shakeout in the last few trading days of the year, the U.S. benchmark S&P 500 index should end with a gain of 30%. In China too, equity returns are neck-and-neck with U.S. markets, around 33% in yuan terms.

But few — in Shenzen or New York — expect such gains in 2020. For one, high-pitched recriminations may resume in 2020, with Chinese tech firms such as Huawei and video-sharing app TikTok seen coming into the U.S. crosshairs.

In both countries, monetary authorities show no enthusiasm for further policy easing — Beijing’s tacit acceptance of slower economic growth should warn investors to curb the exuberance.

As for the S&P 500 rally, many credit interest rate cuts by the Federal Reserve — and it has pressed pause on those. And analysts at Bespoke Investments point out the index has returned an average +6.6% in years following a 20%-plus rally.

But all that’s next year. For now, let seasonal cheer prevail!

(3) A serving of Brexit at Christmas?

A Christmas break from Brexit? Don’t bank on it.

Britain’s newly-emboldened Prime Minister Boris Johnson will be busy readying the legislation required to ratify his Brexit deal through the UK parliament by Jan. 9.

That will finalize Britain’s EU leave date as Jan. 31 and start an 11-month countdown to strike a new trade deal that avoids the UK toppling over a Brexit cliff-edge at the end of 2020.

What other dates should you put in your shiny new 2020 Brexit calendar? Well, here’s a few.

February or March — UK budget that sets out the government’s spending and tax plans.

March — Talks with the EU on a free trade agreement expected to begin and the March 26/27 European Council meeting should be a good point to gauge the mood music.

June - Britain and the EU plan to hold “high level” talks to take stock of progress in the negotiations. Although Johnson is committed not to extend the transition period, if he changes his mind the extension has to be requested by the end of June.

(4) Can Europe’s economies stabilize and move ahead next year?

After putting up a dismal show for three consecutive quarters, Europe Inc. looks poised to come out of earnings recession as the continent’s economy stabilizes, a Brexit outcome seems within reach and trade war worries diminish.

The pan-European STOXX 600 benchmark posted its worst earnings performance in 3-1/2 years during the July-September quarter with a decline of -4.4%. But the October-December quarter is expected to show earnings growth of +3.7%, outshining U.S. earnings for the first time in two years.

So far, despite the earnings slump, European share prices have held up fairly well. That’s led to some stretched valuations, and investors reckon that any further upside would need to be driven primarily by earnings growth.

(5) Little holiday cheer this year in Lebanon and Argentina

Not much Christmas cheer this year for Lebanon and Argentina, the twin trouble spots of emerging markets.

Lebanon’s shopping malls are devoid of their usual December bustle as hard currency shortages make it tricky for consumers to access cash. Mired in economic recession, the country has also endured months of political turmoil as the main parties feuded over forming a government.

A sliver of hope has finally emerged with the appointment of new prime minister Hassan Diab who has vowed to quickly form a government to pass reforms and stave off debt default.

Fellow sufferer Argentina at least has a government — Alberto Fernandez was sworn in as president this month but recession is biting, inflation is above 50% and poverty rates are approaching 40%. Fernandez now faces tough talks with the IMF and creditors on restructuring about $100 billion in sovereign debt.

Zacks #1 Rank (STRONG BUY) Stocks

Heading into 2020, the Info Tech space is where valuations are stretched the most. There are two good stock pick examples — on our Zacks #1 Rank list this week.

(A) Advantest Corp. (ATEYY - Free Report) : This is a $11.3B electronics measuring instruments company. It’s a $57 stock now. This business is closely tied to semi chip production.

I have a Zacks Value score of D, a Zacks Growth score of C and a Zacks Momentum score of B.

The big question is this: When does this tech stock’s share price momentum cool off, given the poor Value and Growth scores?

(B) Fair Isaac Corp. (FICO - Free Report) : This is a $10.8B market cap stock in Computers-IT Services. Shares are priced at a cool $373 each.

I have a Zacks Value score of F (No surprise there!), a Zacks Growth score of B, and a Zacks Momentum score of D.

Once again, trees (Even Info Tech sector driven ones) do not grow into the sky.

(C) Jones Lang LaSalle (JLL - Free Report) : This is a $8.9B market cap stock in the Real Estate Operations space. I see a $172 share price tag.

I have a Zacks Value score of B, a Zacks Growth score of C and a Zacks Momentum score of A.

Note the much better long-term Zacks Value score in the Real Estate space.

Key Global Macro

Over in Europe, the January 31st 2021 European Union withdrawal agreement deadline will be met by the Conservative majority following the recent U.K. election.

In Asia, the calendar-based data line-up will focus upon Chinese PMIs and Japan’s monthly data dump in the coming two weeks.

U.S. calendar-based macro prints should be fairly light over the coming two weeks.

On Monday, U.S. new home sales come out. Look for 730K, after the latest 733K reading.

Mexico’s unemployment rate gets a refresh. I have a 3.7% as consensus. That’s still quite low.

On Tuesday, U.S. durable goods orders come out. Consensus has +1.5% m/m, but just +0.2 m/m ex-transports. The Boeing debacle should start to be baked in.

On Wednesday, this is a Xmas holiday for stock and bond markets.

On Thursday, weekly U.S. jobless claims come out. I have 224K as consensus. That’s quite low.

China’s industrial profits data comes out. The latest was a -9.9% falloff. There is the evidence of the trade war for you.

Columbia’s urban unemployment rate is 10.4%. We get an update. Remarkable to see this country rising again. It’s the good story of 2019 for Latin America.

On Friday, minutes to the FOMC’s December 10th –11th meeting will be released.

The January ISM manufacturing reading for the USA lands. Little change is expected. This key ISM measure continues to hover around the low point since early 2016.

For relevant comparisons: The Markit U.S. manufacturing PMI was left flat at 52.5 in December (52.6 prior). The Empire regional U.S. gauge was also little changed at 3.5 (2.9 prior).

That’s it for this final 2019 edition of the Global Week Ahead.

Enjoy a holiday week with your friends and family!

The world’s stock markets will be here when you get back. The New Year of 2020 will be here next week too.

Warm Regards,
John Blank

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