Stocks firmer, China slows, earnings in focus
Bad news = good news. Relatively lacklustre growth in China
has the market baying for more stimulus. To be fair, despite the headline Q2
GDP number slipping to a 30-year low at 6.2%, there were some signs of
encouragement. Industrial production rose 6.3% in June, an improvement on the
5% growth in May. Retail sales also beat forecasts so. Most of the recent
softness seems trade-related, with exports having dipped 1.3%.
Asia has broadly ticked higher despite, or indeed because of, the softer China GDP numbers. Futures show European markets are higher after a fairly lacklustre weak. Indeed European equity markets moved lower last week just as the US was punching record highs. Time for Draghi and co to turn the taps on.
Indices march higher
Wall Street continues to roar higher, with the S&P
500 closing up half a percent on the day at 3,013.77. Oil and
gold fairly steady.
Bitcoin is weaker, slipping to support around $10k having given up the $11,600 level. FX steady – GBPUSD holding at 1.2570, with EURUSD at 1.1270. Volatility in FX has collapsed with central banks turning the liquidity taps back on.
Earnings season kicks off
Earnings season is coming with fairly low expectations.
Two weeks prior to earnings season 82% of companies that had revised earnings
estimates going into the reporting period had lowered them. Lowballing by Wall
Street ahead of earnings season is normal, but the scale of the downward
revisions is noteworthy. This happened ahead of the Q3 2018 earnings, just
before we saw stocks slump into a bear market, albeit one that has proved very
Recession – We’re likely to see an earnings
recession. Q1 earnings declined 0.29%, therefore making this likely to
become a full-blown earnings recession, that is, back-to-back year-on-year
declines in EPS. In 2016, the last time this happened, we saw earnings decline
for 4 straight quarters. S&P 500 companies are expected to report a roughly
3% decline in EPS this quarter.
Trade concerns – whilst we had a degree of détente at the
G20, existing tariffs are still in place and no meaningful progress has been
seen. There’s a growing acceptance that the US and China are in this for the
long-haul. The US election cycle means we are unlikely to see a reason for
Trump to do any deal until 2020. Whilst for now the mood is upbeat, in the
event of no deal, the lack of progress through the rest of the year would
likely begin to drag on sentiment and affect equity markets. If corporates see
additional tariffs being imposed their EPS forecasts would need to be
revised substantially lower. The impact of the US-China trade war on earnings
is yet to be fully felt but we could hear from a number of large-caps
voicing concerns. The extent to which CFOs highlight worry about trade on EPS
forecasts will be of particular
importance. Of course we are likely to see a lot of kitchen sinking with
companies blaming trade for all manner of ills.
Banks start the ball rolling this week. Big question over
interest rates – rate cuts may well be coming in the US and this will have
implications for banks. Net interest margin would likely fall although the
easier credit conditions would offset some of the negative
effects. Citigroup unofficially kicks off the earnings season on Wall
Street today. How much will banks be affected by Fed rate cuts? In investment
banking, is there anything from the Deutsche carcass worth stripping?
Sports Direct – the
soap opera continues – delays annual results due to House of Fraser
uncertainty. The big question was what impact House of Fraser and various other
acquisitions of dubious value would have on Sports Direct results. A material
impact, one can only assume. HoF must be losing money hand over fist.
Looking to the
earnings, top line growth is expected to rise but profits are seen weaker as
the cost of acquisitions weighs. Since reporting an 27% decline in underlying
profits in the first half we’ve not heard a peep from Sports Direct on
performance. The delay in delivering the annual results does not sit well with
investors, who must be nervous about what it means. It seems likely it’s been a
tough ride in the core Sports Direct retail division, whilst acquisitions have
added nothing but increased costs.