Markets: Steady

By Robert Savage

Monday, December 17, 2018 8:22 AM EST

Crisp and cold markets start the week with the economic data light and the geopolitical headlines mixed. The USD slips from 19-month highs. Oil is steady, emerging markets steady except for Turkey where industrial production was worse. On the positive for risk ledger - the Italian coalition government agreed on a new budget and expects EU approval to avoid disciplinary actions. On the negative – the US slams China trade policy and pushes for WTO reform.

The present story for markets is about low volumes reflecting lower conviction. The forward story is one about fear that US divergence of growth in 2018 can’t sustain in 2019. The USD is the barometer for all this and more as it captures the investment flow plans and the carry game for the FOMC rate hike expectations. The USD reversal overnight is minor in technical terms but important for risk monitoring and the view of many is that we see 96.50 in the US dollar index before we see another run to 98.

The FOMC meeting this week maybe the event to see such volatility, perhaps we trade near both ahead and after it. Until then USD bulls are lonely and the candles are suggesting a range more than a blow-off top.

Question for the Day:Is 2019 going to be worse than priced? The US recession fears are but one of the drivers for markets in 2019, China and the hope for a stimulus package is the other. The Xi growth put assumed in 2018 at 6.5% worked, but 2019 has some risks. The focus on property investment and house prices in China matters and hope for more from the government remains in play this week.

The IMF Asia Pacific director Changyong Rhee warned that Japan and South Korea could be the hardest hit in an extended trade war between the US and China. In October the IMF cuts its global 2019 growth to 3.7% from 3.9%, Rhee warns it may be lower still. “Investment is much weaker than expected. My interpretation is that the confidence channel is already affecting the global economy, particularly Asian economies,” Rhee told Reuters.“We see global growth a little bit slower than we forecast in October,” he noted. China’s central economic work conference this will be a key focus for investors, starting Wednesday with a President Xi speech on the 40th anniversary of China’s reform and economic opening. Reports are that economic advisors are telling Xi to cut 2019 growth to 6.0-6.5% from 6.5% in 2018.

For markets, slower growth means slower earnings and with inflation tighter margins whether that is in the US with 2.5% GDP or China at 6%. Factset latest estimates for earnings suggests much of this is already in the market. For the fourth quarter, analysts expect companies to report earnings growth of 12.8% and revenue growth of 6.5%. For CY2018, analysts are projecting companies to report earnings growth of 20.5% and revenue growth of 8.9%. However, analysts expect single-digit earnings growth for the first three quarters of 2019.

For Q1 2019, analysts are projecting earnings growth of 4.3% and revenue growth of 7.0%.
For Q2 2019, analysts are projecting earnings growth of 4.8% and revenue growth of 5.7%.
For Q3 2019, analysts are projecting earnings growth of 5.2% and revenue growth of 5.4%.
For Q4 2019, analysts are projecting earnings growth of 12.0% and revenue growth of 6.1%.
For CY 2019, analysts are projecting earnings growth of 8.3% and revenue growth of 5.5%.

What Happened?

Australia mid-year review – slashes budget deficit for 2018, sees 2019 surplus. The government took in A$8.3bn more than expected in 1H fiscal year mostly due to higher individual and corporate tax collections. The 2019-20 outlook is for a A$4.1bn surplus. The forecasted deficit for this year has been cut from A$14.5 billion to A$5.2 billion. "The combination of a growing economy with a record number of people in work is helping both sides of the ledger — increasing our revenues, while also decreasing our expenditure," Treasurer Josh Frydenberg said. Exports are tipped to increase 2% this year and 3.5% in 2019-20.
Eurozone October trade surplus rises to E14bn from E13.1bn - more than E12.7bn expected. Exports are up 2.1% m/m, 11.4% y/y to E209.7bn while imports rose 2.6% m/m, 14.8% y/y to 195.8bn.

Eurozone November final HICP revised lower to -0.2% m/m, 1.9% y/y from +0.2% m/m 2.2% y/y – less than 2.0% y/y expected. The core inflation rate fell to 1.0% y/y after 1.1% y/y – as expected. Energy accounted for 0.88pp, services 0.57pp, food/alcohol 0.38pp and non-energy inustrial goods 0.11pp.

Market Recap:

Equities: The US S&P500 futures are off 0.1% after losing 2.2% Friday with focus on 2600 pivot. The Stoxx Europe 600 is off 0.6% to 345.10 while the MSCI Asia Pacific rose 0.2%.

Japan Nikkei up 0.62% to 21,506.88
Korea Kospi up 0.08% to 2,071.09
Hong Kong Hang Seng off 0.03% to 26,087.98
China Shanghai Composite up 0.16% to 2,597.97
Australia ASX up 0.95% to 5,732.90
India NSE50 up 0.77% to 10,888.35
UK FTSE so far off 0.35% to 6,821
German DAX so far off 0.3% to 10,835
French CAC40 so far off 0.45% to 4,830
Italian FTSE so far off 0.35% to 18,847

Fixed Income: Holding and waiting pattern with German Bund yields off 1bps to 0.25%, French OATS up 1bps to 0.72%, Italy up 1bps to 2.94%, Spain off 2bps to 1.39% Portugal off 2bps to 1.63% and Greece up 7bps to 4.28%. The UK Gilt 10-year yields are up 3bps to 1.26%.

US Bonds are bid with focus on equities, economic data and FOMC– 2Y off 1bps to 2.73%, 5Y off 1bps to 2.72%, 10Y off 1bps to 2.88%, 30Y off 1bps to 3.14%.
Japan JGBs holding pattern with BOJ key for week– 2Y flat at -0.15%, 5Y off 1bps to -0.14%, 10Y flat at 0.04%, 30Y off 1bps to 0.78%.
Australian bonds rally on budget and China doubts– 3Y off 1bps to 1.96%, 10Y off 3bps to 2.44%.
China bonds sold with bankruptcies up, reform hopes down– 2Y up 4bps to 2.79%, 5Y up 1bps to 3.07%, 10Y up 2bps to 3.40%.

Foreign Exchange: The US dollar index is off 0.2% to 97.22. USD is mixed in EM – EMEA: TRY off 0.1% to 5.3680, RUB up 0.3% to 66.55, ZAR up 0.1% to 14.353; ASIA: KRW up 0.15% to 1130.1, INR off 0.6% to 71.935.

EUR: 1.1335 up 0.25%. Range 1.1300-$1.1354 with focus on data/FOMC/1.12-1.14.
JPY: 113.45 up 0.3%. Range 113.25-113.52 with focus on equities and risk for 112.50-80 test.
GBP: 1.2625 up 0.30%. Range 1.2571-1.2647 with EUR/GBP .8980 flat. Still about Brexit and UK politics with 2nd referendum call driving.
AUD: .7175 flat. Range .7169-.7185 with budget opening election speculation and tax cut hopes. .7050-.7300 stuck. NZD .6805 up 0.20%.
CAD: 1.3375 flat. 1.3372-1.3391 with data this week key and 1.3300-1.3450 in play still.
CHF: .9940 off 0.30%. Range .9934-.9986 with less Italy fear, focus is on US again 1.00 resistance. EUR/CHF flat at 1.1280.
CNY: 6.8975 flat. Focus is on 6.88-6.92 in the short-term.

Commodities: Oil up, Gold up, Copper off 0.9% to $2.7380.

Oil: $51.65 up 0.9%.Range $51.08-$51.77 with Brent up 1% to $60.91 – still all about demand doubts and OPEC cuts mattering vs US supply - $50-$52 WTI key.
Gold: $1243.60 up 0.2%. Range $1238-$1244. Silver off 0.3% to $14.60. Platinum flat at $785.50 and Palladium up 0.9% to $1182.

Conclusions: Is this just about doubting US divergence? US stock market weakness has been explained by US growth doubts for 2019 with many expecting higher unemployment, slower growth and a Fed pause. The weakness in growth in 3Q from Japan, Germany, Italy, Sweden and Switzerland surprised many investors and it hangs over 4Q. The bounce back in growth hopes are essential to believing that the ECB ending QE and promising to normalize rates in late 2019 is possible. Its also key for how US markets can trade with a world watching the contractions abroad and doubting stability at home as the weakness in housing, freight shipments, flash PMIs - all compete with the FOMC plans to hike this week and more in 2019.