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A quiet calendar masks the potential sources of volatility this week
1. GIIPS Bond Rally to Continue, Attract New Offerings? German Court Ruling Could Influence
As we discussed in depth here, this was the REAL shocker of the week – not the US jobs reports but the sudden surge in demand for GIIPS bonds (and thus falling yields from them) despite an actual increase in their risk from the failed SRM deal.
Also of note in the EU is the German constitutional court ruling on whether Germany can participate in the ECB’s OMT program. If not, it could complicate things for the ECB, and shake general confidence in Germany’s availability to fund similar schemes, which many Germans rule as an attempt at debt mutualization via the back door that ultimately hits German taxpayers.
2. US Jobs Reports Ramifications for This Week
We discussed the full range of ramifications about the rotten US monthly jobs report here. Some of the most important take-away points for the weeks ahead include:
- Canada also had a poor jobs showing. Sure, the two economies are heavily connected anyway, but we suspect this also confirms that the bad weather was a major force. That means:
- Output, spending, and GDP data for both countries is more likely to also reflect slowdowns as they were affected by the same forces that drove down jobs growth figures
- The Fed has an excuse to pause its taper: good for risk assets, bad for safe haven assets and the USD.
- January’s NFP (due the first Friday in February) will be even more important as it will tell us if Friday’s report was just an aberration or a sign of things to come.
3. Ongoing Debate About the Durability of the Rally in Global Stocks
We discussed the latest updates to the bullish and bearish case here. In essence, the ‘stocks are overvalued argument’ is getting stronger, but assets can stay overvalued (assuming you accept this still hotly debated claim) for a long time. Bears also point to extended bullish sentiment indicators, but these too can stay that way as long as stocks don’t fall, and sentiment indicators are notoriously poor indicators for timing market turns.
Goldman Sachs recently weighed in with an opinion that the market is expensive.
The key point made is that although their investors seem comfortable with the S&P 500 multiple at 17x,
“since 1976 the S&P 500 P/E multiple has only exceeded 17x during the 1997-2000 Tech Bubble and a brief four-month period in 2003-04. Other than those two episodes, the US stock market has never traded at a P/E of 17x or above.”
Of course, in 2000, the 10 year note yielded between 5% and 6%+, as opposed to around 3% today. My point is, one can argue that the much greater financial repression that prevails today offers stocks a boost they didn’t have back in 2000, when those elevated forward P/E’s were driven by sheer speculation without the support of desperate baby boomers seeking yield to fund belatedly started retirement plans.
See here for further details.
4. US Earnings Season Kicks into High Gear
As always, earnings season has the potential to be a huge market mover. With so much good news priced in, it’s hard to imagine the rally continuing if earnings season is anything but good, now that QE is on the way out. Balancing these concerns:
- Interest rates remain low, leaving investors seeking yield limited options beyond stocks.
- Earnings estimates are lowballed anyway
Many of the leading names in the critical banking sector report this week, including
- Tuesday: JPMorgan Chase & Co (JPM) and Wells Fargo & Co (WFC)
- Wednesday: Bank of America Corp (BAC)
- Thursday: Goldman Sachs Group Inc. (GS) and Citigroup Inc. (NYS:C), along with non-bank financial heavyweight American Express (AXP)
- Friday: Morgan Stanley (MS), as well as industrial bellwether General Electric (GE)
Consult any decent financial site for a full earnings calendar.
"The estimated earnings growth rate for Q4 2013 is 6.1%," said FactSet's John Butters. "The Financials sector is projected to have the highest earnings growth rate for the quarter, while the Energy sector is projected to have the lowest earnings growth rate for the quarter."
Butters says that the big themes to watch are the impact of unfavorable foreign exchange movements, the status of Europe's stabling but weak economy, and the growth contribution from the emerging markets, which are showing signs of slowing.
5. Other Top Calendar Events That Could Move Markets
It’s a typical light second week of the month calendar. Events that have the potential to move global stock indexes include:
US Retail Sales
US CPI, Philly Fed Manufacturing Index, Bernanke Speech
EU: German Constitutional Court Ruling on constitutionality of ECB’s OMT policy. A negative ruling could block German participation.
US: Building Permits And Housing Starts, prelim UoM Consumer Sentiment, JOLTS Job Openings
Currency traders should also pay attention to events specific to the countries of the pairs they trade.
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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.