Global earnings: Pace of downgrades slowing
Inflection point in downgrade cycle may have been early January
In a welcome development for global equity investors, the pace of 2019 earnings downgrades has eased markedly during the first three weeks of February. Furthermore, while 2019 consensus corporate profits growth has fallen from initial expectations of around 9-11% in developed markets to 6-8%, and from 12% in emerging markets to 10%, a profits recession now appears less likely. It is still in our view a little early to have conviction this is the start of a sustainable trend. However, if it proves to be the case that earnings forecasts have stabilised it will be supportive of the rally in global equities.
Read more...Market outlook: balanced but still biased to upside
Impact of lower rates, China tax cuts and political progress likely to be evident by mid-2019
Weak incoming data, both in respect of profits forecasts and the global economy is in sharp contrast to the strong performance of risk assets such as equities and corporate credit during 2019. Conflicting narratives can certainly create angst but in this case reflect investors’ belief that central banks have acknowledged the slowing global economy. We would concur that easier financial conditions means relief from negative economic surprises may be in sight by mid-year. Despite having risen sharply in the first few weeks of the year, on balance we believe global equities now have the prospect of volatile but still upward progress, as political events unfold.
Read more...Global earnings revisions still on a downward trend
Equities bridging a gap in corporate performance - for now
Consensus profits forecasts on a global basis remain on a downward trend even as January’s recovery in risk assets such as equities and corporate debt continues into February. The primary reason for this at first sight paradoxical state of affairs is not hard to find; the US Fed has placed interest rates on pause and acknowledged the slowing of the global economy. Nevertheless, the clock is ticking on the persistence of the current profits downgrade cycle, which is also consistent with economic weakness evident outside the US. While not shifting our neutral stance on equities for the full year, near-term market performance is now in our view more tightly bound than usual to the turn in the direction of global profits forecasts. Therefore, in the short-term we would not chase the rally, at least until there is some evidence of stabilisation in earnings or positive news in respect of US/China trade.
Read more...ECB fiddles as eurozone turns
Compared to US Fed, ECB seems flat-footed as growth slows
During the recent period of market volatility the US Fed has in our view successfully re-positioned itself on the doveish end of expectations, both in terms of interest rate and more recently balance sheet policy. The ECB in comparison appears flat-footed, with ECB President Draghi failing to use the opportunity in his press conference last week to emphasise policy flexibility in the event of a downturn. Ironically, the most recent disappointing incoming data is concentrated in the eurozone, rather than the US.
Read more...FOMC Minutes: Up to speed with events but US-centric
Meeting minutes suggested Fed closer to market views than originally thought
The minutes of December’s FOMC interest rate meeting suggest the US Federal Reserve is in fact more attuned to the recent tightening of financial conditions and risk of a slowdown than first thought. Tweaks to the language in the FOMC’s December statement were intended to emphasise the data-dependency of the Fed’s monetary policy stance and also that only limited policy tightening was now envisaged. While we view this as reassuring for the remainder of 2019, the heightened volatility of global markets following Fed Chair Powell’s press conference demonstrates the ease of a miscommunication when interest rate policy becomes politically charged.
Read more...FOMC: US Fed merely matches expectations
Only a watching brief on overseas developments risks the dreaded divergence
Taking into account US economic conditions of full unemployment and inflation close to target, the reiteration in yesterday’s FOMC statement of the policy of gradually returning US rates to neutral levels is understandable. Furthermore, lowering the rate trajectory for 2019 from 3 to 2 projected rate hikes also makes sense given the tightening of financial conditions (namely falling equity prices and rising credit spreads) since the summer. However, we believe markets were looking for something stronger than ‘wait and see’ to counter the negative psychology which has led to a very poor December for global equity markets.
Read more...