In the Global Week Ahead, a fresh “tale of the tape” will show us an open trading battle…

One that has not been seen for months.

After U.S. military events in Baghdad taken against Iran, buyer and seller frontlines are more fairly drawn, between steady stock market bulls and newly pessimistic bears.
For months, bullish traders have put their full trend-following faith in the U.S. Fed.

However, this week, observers shall note a newfound roar from stock market bears.

Bearish traders will be taking their profits off the table. In front of an almost certain, intensifying global clash between the U.S. and Iran.

Today, Reuters refreshed the bull case for us, via the Fed’s ongoing “repo” buying.

The New York Fed began injecting billions of dollars of liquidity into the repo market in mid-September, when a confluence of events sent the cost of overnight loans as high as 10%, more than four times the Fed’s rate at the time.

A month later, the Fed moved to expand its balance sheet — and boost the level of reserves — by snapping up $60 billion a month in U.S. Treasury bills. The Fed will continue pumping tens of billions a day into the repo market through at least the end of January.

Its ability to exit from the repo market after that time will depend on how long it takes the central bank to make the balance sheet large enough so there are adequate reserves in the banking system — and the repo operations are no longer needed.

“It seems implausible to me that the Fed will be able to stop their repo operations by the end of January,” said Mark Cabana, head of U.S. rates strategy at Bank of America Merrill Lynch.

Minutes from the Fed’s December policy meeting released on Friday showed its staffers expected repo operations to be “gradually” reduced after mid-January.

However, staff members also said the central bank may need to continue offering some repo operations until at least April, when tax payments could reduce the level of reserves.

At the end of last week, Reuters also put out its usual five world market themes.

I kept the rises in oil prices, due to the U.S. Iran clash, at the top of the list. Read on.

(1) With U.S. Iran tensions rising, the world’s oil prices are heading up.

Geopolitics is back in the driving seat.

The U.S. killing of a top Iranian commander has doused the nascent New Year rally and delivered a $3 boost for oil prices on fears that any violent retaliation from Tehran would disrupt energy supplies.

Brent crude futures have actually only risen to their highest since mid-September, when an attack on Saudi Arabian crude facilities sparked the biggest price jump in more than 30 years. Whether oil markets calm down and stocks resume their climb hinges on what happens next.

September’s oil price spike was short lived as Riyadh didn’t respond to the attacks, which the U.S. blamed on Iran and which Iran in turn denied. However, if Iran fulfills its threat of “severe retaliation” over the killing of General Qassem Soleimani, it could well magnify market moves.

Any conflict, and surging oil prices, risk snuffing out the nascent global economic recovery.

(2) The global rates markets won’t move much, with a rise in U.S. Iran tensions.

The ructions in the Middle East are a reminder of how hard it will be to kill off a near four-decade-long bull market.

Global bonds had a tepid start to 2020 following a year when U.S. and German borrowing costs posted their biggest annual falls in five years. With a resolution to the U.S.-China trade spat in sight and recession risks receding, super-low bond yields no longer seemed justified. German 10-year government bond yields touched seven-month highs on the first trading day of the new year, while 15-year yields briefly edged above 0% for the first time since July. The U.S. yield curve — a classic indicator of recession risk — is near its steepest levels since October.

Upcoming readings of Eurozone inflation and U.S. employment could encourage further bond selling, should they beat forecasts, but most still think it’s too early to call time on the rally.

For all the talk that sovereign bonds are expensive, many investors are still clearly sticking with them.

(3) Don’t forget about the usual U.S. nonfarm jobs number out Friday.

Friday brings the first U.S. jobs release of the decade.

While it will be hard to beat the 2010s for growth and equity gains, the December 2019 figures could extend year-end bullishness and amplify campaign braggadocio from President Donald Trump.

Leading up to November’s election, he seems to have little to worry about on the economic front.

November’s 3.5% jobless rate was the lowest in half a century and the 266,000 jobs added were the most in 10 months. Last month’s hiring is forecast to have eased to 165,000, still well above the 100,000-a-month rate needed to keep up with growth in the working-age population.

The labor picture suggests Trump’s trade war with China has not had much impact on the broader economy, which clipped along at a 2.1% pace in the third quarter. Manufacturing hiring did take a hit, but hopes are high for a “Phase One” trade deal on January 15th.

If payroll numbers meet or beat expectations, Trump won’t miss an opportunity to repeat tweet “JOBS, JOBS, JOBS.”

(4) Will the “Phase One” U.S. China trade deal get signed in mid-January?

Nearly two years of brinkmanship, stop-start negotiations and tit-for-tat tariffs could end on Jan. 15th, the date that President Trump says will see Beijing and Washington ink a “Phase One” trade deal.

But China’s leadership has kept mum on the subject, and investors don’t know for sure what the deal text will actually say, keeping global markets on edge.

In recent days, Chinese markets have basked in the afterglow of upbeat retail sales data, solid manufacturing gauges and fresh stimulus measures with the central bank slashing banks’ reserve ratio requirements.

But what next?

Services PMIs published on Monday will be crucial, as will Thursday’s inflation figures. Tuesday will bring data on central bank reserves, indicating whether Beijing’s $3 trillion war chest is growing or diminishing.

(5) The U.K. House of Commons reconvenes on Tuesday, January 7th

For some, the New Year brings fresh resolutions, for Britain’s parliament it brings back a Brexit withdrawal bill.

Lawmakers reconvene on Jan 7th and will debate the “divorce deal” Prime Minister Boris Johnson has agreed to with Brussels.

The bill goes to Parliament’s upper house on Thursday and should allow Johnson to fulfill his pledge to “get Brexit done” by Jan. 31st.

But the no-deal Brexit concerns that weighed on U.K. markets in 2019 haven’t dissipated and sterling is back below $1.31, from December highs above $1.35. Once Parliament approves the agreement, the clock starts ticking on Britain’s future trade relationship with the EU. If an agreement isn’t reached by end-2020, the outcome may yet be that Britain is cut loose without trade arrangements in place.

However, with one Brexit step likely taken by the end of the month, sterling could react more than last year to economic data. Reuters polls predict the final reading of December’s U.K. services activity on Monday will reveal a slight uptick, though stay in contraction territory below 50. House price data on Wednesday could also offer clues on Britons’ willingness to splash out on property now that there is a bit more Brexit clarity.

Zacks #1 Rank (STRONG BUY) Stocks

(A) Heico Corp. (HEI Quick QuoteHEI - Free Report) : With a rise in military conflict ahead, the U.S. Aerospace & Defense industry will get a bullish nod. This is one Zacks #1 Rank stock in that mix.

Florida-based Heico Corporation was incorporated in 1957. The company is one of the world’s leading manufacturers of Federal Aviation Administration (“FAA”)-approved jet engine and aircraft component replacement parts.

This defense-related stock has a $16.2B market cap and a heady $120 share price already. That gives this pick a lousy Zacks Value score of F to go with its solid Zacks Growth score of B.

(B) ST Microelectronics N.V. (STM Quick QuoteSTM - Free Report) : This is a $24.5B market cap semi chip stock. It is based in the Netherlands and lists in Europe. I have a Zacks Value score of D and a Zacks Growth score of C. That is producing a Zacks Momentum score of A.

That’s right! Take in those three long-term Zacks score together. It doesn’t make any GARP sense, where you buy “Growth At a Reasonable Price.” Given (D + C = A).

(C) Barclays PLC (BCS Quick QuoteBCS - Free Report) : This week, Brexit will be back in the headline mix. Let’s look into a major U.K. banking stock.

This $41B market cap pick trades at a paltry $9.50 a share. I note this produces a Zacks Value score of B to go with an awful Zacks Growth score of F.

The market is saying this: Good luck Mr. Johnson!

Key Global Macro

On Monday, the Caixin mainland China services PMI came in at 52.5, versus a prior 53.5.

The Euro Area composite PMI for December should be 52, holding steady versus a prior 52.0.

The U.S. Markit Services PMI should be 52.2.

On Tuesday, the Jibun Bank Japan services PMI should be 50.6.

Euro Area retail sales should be up +1.4% y/y. The core Euro Area CPI should be up +1.3% y/y. Those are tepid.

The U.S. non-manufacturing PMI from ISM should be 54.5.

On Wednesday, we get the U.S. private sector ADP job additions. The number in consensus is +150K.

The Fed’s Brainerd gives a speech.

On Thursday, the Euro Area unemployment rate should stay steady at 7.5%.

U.S. weekly jobless claims should look low again, at 222K.

The Fed’s Williams gives a speech.

On Friday, U.S. nonfarm payroll look to add +160K in December. The broader U6 unemployment rate should be 6.9%. The usual household unemployment rate should hold steady at a 3.5% rate.

Average U.S. hourly earnings should be going up +3.1% y/y, a steady call from the last monthly report.

The U.S. Baker Hughes rig count comes out. I see a low 670 rigs is the call. That beleaguered group of drilling firms in there will be getting a boost this week, from higher oil prices.

The U.S. WASDE agricultural report comes out too. That’s another beleaguered sector.

I close with two overlooked matters: the S&P 500’s earnings and its valuation.

First, earnings outlooks drawn up on the last quarter are not improving. On Sept. 30th, the estimated S&P 500 earnings growth rate for Q4 2019 was +2.5%. All 11 S&P 500 sectors showed lower growth rates on Jan. 3rd (compared to Sept. 30th) due to downward revisions to EPS estimates.

Second, there is the S&P 500’s heady valuation. The forward 12-month P/E ratio for the S&P 500 is 18.3. This core P/E valuation ratio is +9.5% above its 5-year average of 16.7 and +22.8% above its 10-year average of 14.9.

Given that setup, it is truly surprising.

That stock market bears have had such a hard time of it for so long.

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