The road to success is dotted with many tempting parking spaces – Will Rogers

The urge to get off the road and wait out the impeding storm has been in play since 2019 started. The FOMO (fear of missing out) was countered by the JOMO (joy of missing out) in December. Memories matter less today to markets than moods drive them, but both are in the playoffs of bulls and bears as asset markets face a heavy week ahead. The playoff to a bigger game and a bigger risk-reward crunches the odds for the investor like a linebacker. The sport analogy for NFL fans today in the race to the Super Bowl may be part of the psychology in the US as old school meets new school quarterbacks.  There is no one way to win a game and so too, the race for absolute returns finds many different mixes for risk and return in the race for profits.

For the world, playoffs happen all the time.The wall of worry was climbed again last week as China/US trade deal hopes rise even as growth falls. The positioning for equities, FX and rates looks cleaner now than in the bearish start to the year but the momentum higher will need something more in the tank than hope to propel it further.

In fact, the gloom over the last quarter has set into forecasts for 1Q leaving it harder to chase the market and believe in the price action. 1H2019 earnings estimates for the S&P 500 are now the lowest in four years, according to Factset. The bottom-up EPS estimate for the first half of 2019 (1H 2019) decreased by 4.5% (to $81.73 from $85.56) over the past three months. The price action up clashes with the mark down in earnings.  

There are other anomalies to consider, the FOMC pause in rate hikes versus a cut and the slowing of orders and confidence and the bounce up in 10-year yields against the probabilities of a FOMC rate hike in 2019. The weakness of survey data in Europe against the expectations of a soft-patch bounce back with German auto emissions, Italian political noises and French yellow-vest protests blamed. The optimism in commodities against the weakest growth in China in 28 years based on the hopes for stimulus plans to work again. The rally up in GBP against the worst vote outcome for a Prime Minister in the UK for over 100 years based on the hope for a Brexit delay and potentially reversal with another referendum.  

Markets are playing off fear and greed with the road to success ahead long and with miles to go before there is another gas station. The week ahead for markets isn’t likely to resolve the clashes of confidence and politics with much certainty like the US football games today. 

Question for the Week Ahead: What is the next wall of worry for investors to climb?  

The ability for markets to see greed beat fear rests on the list of worries below being fully priced and their outcomes to be better than expected. The WEF Davos global risk report for 2019 is a good place to start.  

The report sees increasing polarization, rising dependency on computer/internet, climate change, rising nationalist/populist politics, changing international governance rules and rising income/wealth disparity as key issues.

The week ahead will bring a host of international leaders and their speeches on these topics driving markets. It will also bring protests against Davos and the idea of globalization and the role that global corporatations and G20 leaders play in the rising disparity of rich and poor. Along with it we have the list of more immediate concerns – from UK Brexit to China growth to ECB and BOJ policy responses.

Brexit Plan

The floating of the idea that the UK/Ireland have a bilateral border deal was immediately squashed this weekend. The Irish foreign ministry said on Sunday there had not been “any official request for a bilateral treaty” to replace the backstop. A government spokesman insisted that such ideas would not be entertained.

China GDP

The news Monday on 4Q GDP is likely to confirm that China has seen its growth slow to 28-year lows. This is blamed on its population aging, the stall in productivity, the US/China trade disputes, the previous tightening of liquidity to battle credit bubbles and the Xi push for reform across the nation. Whether China can grow if US/China trade issues are resolved may be the key question for 2019. The IMF sees the switch from investment to consumption as being still too slow. 

ECB meeting

The January meeting will be an important one to see if the data collected from December matters to the central bank. The December projections led to a lower outlook for growth and inflation with autos in Germany, protests in France, EU budget battles in Italy all cited. What Draghi will do in the upcoming press conference will be critical to how markets see the EUR and the growth outlooks in contrast to the December forcasts. 

Market Recap

Hope for a US/China trade deal, UK May losing the Brexit vote but surviving a no-confidence vote leading to delay hopes, ECB Draghi sounding dovish, Fed speakers and the Beige Book sounding dovish, better bank earnings, weaker economic data from Europe, mixed data from the US, weaker China trade data offset by more stimulus, easier PBOC, along with ongoing political troubles in the US and elsewhere – all that left markets still searching for risk-on new year trades.  

The US consumer confidence from University of Michigan survey showed sentiment at two-year lows linked to US government shutdown concerns, while the Philadelphia Fed manufacturing survey rebounded while the NY Empire Fed was weaker.  

German 2018 GDP was the lowest in 5-years at 1.5%, but likely averts a technical recession in 4Q. Japan CPI slowed to 0.3% y/y from 0.8% - lowest since October 2017. Japan core machinery orders fell 6.4% in November – citing US/China trade issues. In EM, Turkey’s central bank stayed on hold at 24%, lifting its stock market, China’s PBOC added over $83 billion of liquidity into money markets, Brazil saw the Bovespa gain over 2.6% with pension reform hopes.

Equities

The MSCI all-country World Index rose 2.16% to 483.50 on the week. The MSCI EM index rose 1.698% to 1017.99 on the week. This was the fourth week of stock gains. The bankruptcy announcement by US PG&E due to California wildfire liabilities hit the utilities sector while consumer stables lagged as well. The volume was light compared to previous weeks but volatility measures continued lower.

The 4Q US S&P 500 earnings with 11% of the companies reporting showed 76% beat earnings and 56% beat revenue expectations.The 4Q blended earnings now 10.6% - still down from the 12.2% expected from Dec 31 – but would be the fifth quarter of double-digit earnings. 

• The US S&P500 rose 2.87% to 2,670.71 on the week, up 6.54% year-to-date.  The DJIA rose 2.96% to 24,706.35 – now less than 10% off its all-time highs – while the NASDAQ rose 2.66% to 7,157.23 on the week still in correction territory.  The Russell 2000 rose 2.28% to 1,480.67 on the week, leads gains on the ytd u 9.8%. The Cboe VIX fell 2.14% to 17.80 on the week off 30% ytd. 
• The Stoxx Europe 600 rose 2.25% to 357.05 on the week, now up 5.75% ytd.  The German DAX rose 2.92% to 11,205.54 on the week. The French CAC40 rose 1.98% to 4.875.93 on the week. The UK FTSE rose 0.72% to 6,968.33 on the week. The Italian FTSE MIB rose 2.17% to 19,708.06 on the week. 
• The MSCI Asia Pacific Index rose 1.32% to 153.35 on the week, up 4.53% ytd. The Japan Nikkei 225 rose 1.5% to 20,666.07 on the week, up 3.25% ytd with TOPIX up 4.25% ytd.  The Hong Kong Hang Seng index rose 1.59% to 27,090.81 on the week. The China Shanghai Composite index rose 1.65% to 2,596.01 on the week. The India CNX Nifty index rose 1.04% to 10,906.95 on the week. The Australian ASX index rose 1.82% to 5,941.20 on the week. The Korea Kospi index rose 2.35% to 2,124.28 on the week. 

Fixed Income

The safe-haven bid for bonds faded last week. Economic data was mixed in the US. Credit improved with high yield led by energy holding bid and with less than expected inventory. Investment grade lags with BB focus. The FOMC message of patience continued and moderated some of the selling. China rates continued to fall and led the easy money story across the world with focus in the week ahead on central bankers and their reaction function to 4Q weakness along with political uncertainty. 

• US bonds lower on profit-taking, safe-haven bid ebbs– 2Y up 7bps to 2.62%, 3Y up 7bps to 2.60%, 5Y up 9bps to 2.62%, 10Y up 9bps to 2.79%, 30Y up 6ps to 3.10%. 
• Canadian 10-year bond yields rose 8bps to 2.04% on the week– higher CPI due mostly to airline calculation shift one factor, US move the rest. 
• Japan JGB yields off 1bps to 0.01% on the week. The focus is on BOJ and CPI/growth mixes. 
• Australian 10Y bond yields rose 4bps to 2.34% on the week– tracking US rates and US/China trade talk hopes. 
• UK Gilt yields rose 7bps to 1.36% on the week –Brexit delay being priced with UK May surviving key. GBP and BOE next keys. 
• German Bund yields rose 8bps to 0.26% on the week with return to risk driving, political issues, ECB next keys
• French OAT yields flat at 0.66% on the week– with Macron and yellow vests issues remaining but slowing. 
• Italian BTP yields fell 17bps to 2.74% on the week– between ECB hopes, better banks, ongoing EU/political support
• Spanish Bono yields fell 10bps to 1.36% on the week– with focus on 1.25% next and politics.
• Portugal 10-year bond yields fell 12bps to 1.59% on the week– tracking Italy. 
• Greek 10-year bond yields fell 12bps to 4.18% on the week– Government survives – growth and ECB keys with 4.0% next big level. 

Foreign Exchange

 US dollar index rose 0.7% to 96.34 on the week – higher US rates key.  Emerging Markets were dollar mixed: EMEA– ZAR off 0.1% to 13.838, RUB up 1.05% to 66.168, TRY up 2.2% to 5.327; ASIA- CNY off 0.65% to 6.801, KRW off 0.7% to 1125, INR off 1.15% to 71.20; LATAM– MXN up 0.3% to 19.077, BRL off 1.05% to 3.75, ARS off 1.9% to 37.575. 

• EUR: 1.1360 off 0.9% on the week with 1.1320-1.1535 keys into ECB.
• JPY: 109.75 up 1.1% on the week with equities bouncing, BOJ and US rate support – EUR/JPY 124.70 up 0.2% on the week. Focus is on 110 with 112 correction risks
• GBP: 1.2875 up 0.25% on the week with EUR/GBP.8825 off 1.2% - all about Brexit delay and unwinding worst case fears 1.26-1.31 still in play. 
• CHF: .9955 up 1.1% on the week with risk-on driving, EUR/CHF up 0.25% to 1.1310 with 1.1380 and 1.1250 keys – Davos next week key. 
• AUD: .7165 off 0.65% on the week with weaker China trade, less domestic stories and .7050-.7300 consolidation. NZD .6740 off 1.3% on the week – hit on RBNZ easing talk, weaker dairy prices,
• CAD: 1.3255 off 0.05% on the week. Focus is on US and China stories along with oil – CPI higher puts 1.3050 risk into play with crosses key. 

Commodities

 The S&P/GSCI rose 2.58% to 2,430.69 on the week. Oil again key to index but Nat Gas led with winter weather driving up 12.3%. Losers were precious metals (ex palladium) also notable hit to Mile off 1.85%. 

• Oil: $53.80 up 4.28% on the week with $55 WTI back in play as OPEC output, global demand hopes spur ongoing rally. Brent up 3.67% to $62.70 (Mar futures).
• Gold: $1282.60 off 0.5% on the week– hit with USD and risk-on unwinding safe-haven bid with $1285 pivot for $1268 retest. Silver off 1.6% to $15.399 with $15.75 cap for $15.20 and lower. Platinum fell 1.95% to $802.10 and Palladium up 4.4% to $1335.10 – on China stimulus/clean auto demand. 
• Corn: $381.60 up 0.95% on the week. US/China trade story and higher energy costs drive. Soybeans up 0.7% to $916.60 with trade hopes and weather driving elsewhere. Wheat 0.3% to $574.20. 
• Copper: $2.7125 up 0.15%.March futures up 2.14% to $2.7190. Equities and China leading – Iron Ore up 1.5% to $73.40 also on China stimulus hopes. 

Calendar for the Week Ahead

The week ahead brings the Davos WEF, the US MLK holiday, more US government shutdown politics, more central bank decisions and outlooks with the ECB and BOJ front and center. The China data that starts the week – 4Q GDP along with industrial production and retail sales will be key to setting the tone on whether the US trade deal hopes are enough along with Beijing stimulus to keep the global growth hopes intact.

The flash PMI reports are expected up in Europe and down in Japan and US while the German IFO and ZEW are also expected to moderate.  

Earnings for 4Q will continue to matter as will the sparse US data on housing and jobless claims. 

Monday, January 21: US MLK holiday, China 4Q GDP, Dec IP, retail sales, German PPI, WEF Davos starts

• 0600 pm Japan Jan Reuters Tankan 23p
• 0900 pm China 4Q GDP 6.5%p 6.4%e 
• 0900 pm China Dec retail sales 8.1%p 8.2%e
• 0900 pm China Dec industrial production 5.4%p 5.3%e
• 0900 pm China Dec (ytd) fixed asset investment 5.9%p 6%e
• 0200 am German Dec PPI (m/m) 0.1%p -0.2%e (y/y) 3.3%p 2.9%e
• 0600 am German Bundesbank monthly 

Tuesday, January 22: UK jobs, German ZEW, US existing home sales

• 0600 pm Korea 4Q GDP 2%p 2.8%e
• 0400 am Spain Nov trade deficit E3.8bn p E3.0bn e
• 0430 am UK Dec claimant count 21.9k p 20k e / 3M Nov unemployment 4.1%p 4.1%e / average earnings 3.3%p 3.3%e / ex bonus 3.3%p 3.3%e
• 0430 am UK Dec PSNB GBP6.35bn p GBP1.2bn e
• 0500 am German Jan ZEW economic sentiment -21p -20.1e / current conditions 45.3p 43e
• 0830 am Canada Nov wholesale sales (m/m) 1%p 0.4%e / manufacturing sales -0.1%p -1.1%e
• 1000 am US Dec existing home sales (m/m) 1.9%p -1.3%e / 5.32mn p 5.25mn e
• 1130 am US sells 3M and 6M bills

Wednesday, January 23: Japan Trade, BOJ rate decision, Canada retail sales, Richmond Fed manufacturing

• 0545 pm New Zealand 4Q CPI (q/q) 0%p 0.9%e (y/y) 1.8%p 1.9%e
• 0650 pm Japan Dec Trade deficit Y737bn p Y30bn e / exports 0.1%p -1.9%e / imports 12.5%p 3.7%e
• 1000 pm Japan BOJ rate decision – no change from QE but 1Q outlook cut to CPI/GDP
• 0245 am French Jan business confidence 104p 103e
• 0540 am German 5Y Bobl auction
• 0600 am UK Jan CBI industrial trends orders 8p 5e / 1Q optimism -16p -26e
• 0830 am Canada Nov retail sales (m/m) 0.3%p -0.5%e / ex autos 0%p -0.5%e
• 0900 am US Nov FHA house prices (m/m) 0.3%p 0.2%e
• 1000 am US Richmond Fed manufacturing index -8p -6e
• 0430 pm US weekly API oil inventories -0.56mb p

Thursday, January 24: Australian jobs, Japan, EU and US flash PMI reports, BOK rate decision, ECB rate decision

• 0700 pm Australia Dec Westpac LEI -0.1%p 0.1%e
• 0730 pm Australia Dec employment changes 37k p 16.5k e / unemployment rates 5.1%p 5.1%e / participation 65.7%p 65.7%e
• 0730 pm Japan Jan flash manufacturing PMI 52.6p 52.4e
• 0800 pm Bank of Korea rate decision – no change from 1.75% expected
• 1200 am Japan Nov final LEI 99.6p 99.3e / coincident 104.9p 103e
• 0315 am France Jan flash composite PMI 48.7p 50.9e / manufacturing 49.7p 49.9e / services 49p 50.5e
• 0330 am German Jan flash composite PMI 51.6p 51.9e / manufacturing 51.5p 51.3e / services 51.8p 52e
• 0330 am Sweden Dec unemployment 5.5%p 5.8%e
• 0400 am Eurozone flash composite PMI 51.1p 51.4e / manufacturing 51.4p 51.4e / services 51.2p 51.5e
• 0500 am France sells 3 and 5Y BTAN
• 0745 am ECB rate decision – no change from -0.4% and 0% rates
• 0830 am US weekly jobless claims 213k p 220k e
• 0945 am US Jan flash composite PMI 54.4p 54.2e / manufacturing 53.8p 53.5e / services 54.4p 54.2e
• 1000 am US Dec conference board LEI 0.2%p
• 1100 am US weekly EIA oil inventories -2.683mb p

Friday, January 25: Australia holiday, Japan Tokyo CPI, German IFO

• 0630 pm Japan Tokyo core CPI 0.9%p 0.9%e 
• 0330 am Sweden Dec retail sales (m/m) 0.8%p 0.2%e
• 0400 am German Jan IFO 101p 100.6e / current conditions 104.7p 104.2e / expectations 97.3p 97.0e
• 0600 am UK Jan CBI retail trade -13p +2e

Conclusions: Is the US 1Q slowdown more than a soft-patch?

The weakness in first quarter growth for the US is a seasonal adjustment black-hole for economists. However, this time is different thinking pervades, with the excuses for weakness proliferating from US government shutdowns, to US/China trade pushbacks, to the unwinding of tax reform gains and business spending. Markets are prepared for some bad news, but just how much matters. The ECRI weekly index is at 6-year lows with the 4-week moving average -3.28% to Aug 2012 lows. The fear of a recession in the US receded significantly with the FOMC patience and with the US/China trade deal hopes key factors. Whether the economic indicators elsewhere or earnings from 4Q with gloomy outlooks for 1Q matter, all are in “play” for the week ahead for markets.