BREXIT MAY DAY

With less than 80 days to go until Britain leaves the European Union, the path to Brexit winds to a critical crossroads on Tuesday when lawmakers vote on Prime Minister Theresa May’s withdrawal deal. The agreement, which May and EU leaders say cannot be renegotiated and is the only one available, will almost certainly be rejected. If so, uncertainty, paralysis and the likelihood of a disorderly ‘no deal’ Brexit will rise.

Volatility is nothing new to sterling, Friday being a microcosm of how the FX market is playing Brexit. A media report that Britain’s departure could be delayed sent the pound shooting up nearly a cent to its highest since Nov. 29, then minutes later May’s spokeswoman ruled out any delay and the pound fell right back again. All eyes on the big vote in Parliament on Tuesday.

 

PRICE PRESSURE

The Fed reckons the world’s biggest economy is continuing to motor ahead but markets seem to think otherwise, their fears for the growth outlook knocking equity prices off record highs. More recently though they have cheered Fed Chairman Jerome Powell’s comment that the U.S. central bank can be patient in approving any further rate increases. Powell said that “especially with inflation low and under control”, the Fed can “be patient and watch patiently” to figure out which of the two competing narratives unfolds in 2019.

So whose view is correct? It’s true labour markets are robust and wage inflation has been on the rise — average earnings rose in December by 3.2 percent on an annual basis, matching October’s rise which was a 9-1/2-year high. But workers’ wage gains are also being eroded by inflation, with core CPI seen above the Fed’s 2 percent target in coming months. Powell’s newly dovish-sounding rhetoric has prompted money markets to price out Fed rate rises in 2019 but the producer price index due Tuesday could be key. If it shows inflationary pressures cooling, there could be a further reprieve from markets’ rate-hike concerns.

 

EARN, BABY, EARN

Global stock markets have suffered in recent weeks on fears that economic growth — and company earnings — are on the decline. Upcoming U.S. company earnings will test this view.

Big U.S. hitters due to issue fourth-quarter results next week include Netflix (Thursday), and major Wall Street banks Citi, JPMorgan and Wells Fargo. Money has started trickling back into equity funds this week thanks to Powell’s dovish comments. But earnings expectations remain low nevertheless and data indicates S&P 500 earnings will have grown 14.5 percent in the fourth quarter of 2018, the slowest since Q3 2017, sharply lower than the 28.4 percent rise in Q3 2018 and almost flat year-on-year.

And confidence in Europe is even lower — earnings-per-share (EPS) for STOXX 600 companies is expected to have grown 7.1 percent in Q4, half levels seen in Q3 and Q4 2017. Forecasts as recently as November were for 14 percent growth but a spate of nasty macro-economic surprises has caused analysts to downgrade their view.

Some strategists do reckon markets have got ahead of themselves by pricing in a growth slowdown or recession. Company results could show who’s getting it right.

 

CHINA’S ECONOMY IS HURTING

China and the United States have held their first face-to-face talks since the two world powers agreed a 90-day trade war truce. Described as “extensive”, the talks have helped cheer up global equity investors. But risk aversion could rear its head again should hard data from China show what damage has been done to the economy by the initial tariff rounds.

China’s exports unexpectedly fell the most in two years in December, while imports also contracted, pointing to further weakness in the world’s second-largest economy in 2019 and deteriorating global demand.

Adding to policymakers’ worries, data on Monday also showed China posted its biggest trade surplus with the United States on record in 2018, which could prompt President Donald Trump to turn up the heat on Beijing in their bitter trade dispute.

Softening demand in China is being felt around the world, with slowing sales of goods from iPhones to automobiles, prompting warnings from the likes of Apple and from Jaguar Land Rover, which last week announced sweeping job cuts.

 

GOLDMAN PREDICTS 2019

U.S. stocks could deliver big gains in 2019 if history is any guide, and some companies have more potential to outperform than others, according to Goldman Sachs Group Inc.

The S&P 500 typically rebounds after declining 20 percent within a quarter, and historical precedents of policy concerns and late-cycle drawdowns show potential for major upside, strategists led by David Kostin wrote in a Jan. 11 note. The U.S. benchmark came to the brink of a bear market late December before ending 2018 down 6.2 percent after two years of gains.

Stocks forecast to boost margins by 50 basis points annually would also be attractive, the reports said. It added that such firms are scarce due to late cycle dynamics, but they would include Netflix Inc., TripAdvisor Inc., Expedia Group Inc. and Chipotle Mexican Grill Inc.

Goldman also noted that stocks exposed to U.S.-China trade have lagged, including Micron Technology Inc., Corning Inc. and MGM Resorts International.

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