Economic Data v Earnings. Which Will Come out on Top?
The Lie of the Land
The economic calendar is sparse through the day ahead. A lack of stats through the Asian session supported solid gains across the Nikkei, Hang Seng, and CSI300.
Following better than anticipated earnings from JPMorgan and Wells Fargo, the herd is back and looking to avoid missing out on another rally across the majors.
Following late last year’s sell-off, which left the Dow down at a 12-month low 21,792.2, it’s been onwards and upwards.
Market jitters over an extended trade war between the U.S and China have lingered throughout but failed to deter investors from snapping up stocks following the Christmas Eve low.
So, with an extended trade war, downward revisions to growth forecasts, not just by central banks, but also the IMF, the possibility of a no-deal Brexit and Trump’s threat of a widening trade war with the likes of Japan and the EU, is this all a recipe for disaster?
Perhaps the first thing to consider is the inverted yield curve that impacted risk appetite in late March. Whilst acknowledging that the 3-month / 10-year Treasury yield curve had in fact inverted, the recession indicator has tended to be the 2-year / 10- year, which had not inverted.
Unsurprisingly, a positive curve returned going into a traditionally bullish April.
Since the start of the 2nd quarter, economic data out of the U.S has fared somewhat better than the stats out of Europe. Despite this, the U.S majors have fallen behind the European majors this month.
For the first 2-weeks of April, the DAX leads the way across Europe and the U.S markets, having surged by 4.11%. To put it into perspective, the Dow was up by just 1.87% and 1.03% of that came last Friday.
Not only has the DAX outperformed, but the outperformance has come at a time of Dollar weakness. The EUR was up by 0.72% for the current month and with a heavy biased towards multi-nationals focused on overseas demand, that’s not bad going.
Weak data, rising factory gate prices for overseas buyers and a particularly dovish central bank have been a reflection of the economic environment since the late part of the 4th quarter of last year.
One curveball for the majors has been corporate earnings. In spite of a weaker global economic environment and outlook, earnings have yet to knock the bulls of course.
Talks of recession have abated and this earnings season may well deliver fresh record highs for the major bourses.
Can the economic data due out over the coming weeks pour cold water over yet another earnings fuelled rally?
It will all boil down to Corporate America’s outlook. The timing of the U.S – China trade talks couldn’t have been better. Just as the market began running out of steam, progress was made. Just as earnings season kicks in, both sides are on the precipice of a historic agreement.
All of this suggests that the markets will be more interested in earnings and outlook rather than the stats. Once a U.S – China trade agreement is in place, the stats will be the economic barometer once more.
Recession averted, a trade agreement could be just the catalyst to put growth back on track. Economic data will then be the forward indicator. For a short period of time, the FED will likely hold back from rocking the boat. But, it will rock the boat, eventually.
The best possible near-term outcome will ultimately become the worst possible outcome for the major equity markets…
A rebound in global demand, strong growth and consumption and a jump in inflationary pressures. U.S President Trump is desperately looking to place anti-interest rate hike protagonists into the FED… And, it’s not a surprise. For Trump to be re-elected in the 2020 U.S Presidential Elections, not only does the U.S economy need to be on a firm footing, but the equity markets will also need to be lining voter pockets.
So, in summary…
Earnings will be the key driver in the coming weeks. Once a U.S – China trade agreement is in place, the stats will begin to be the main area of focus. At the end of the day, the endlessness to this pit of almost free money cannot go on forever…