As I like to do with some regularity, let’s take a look at London-based Reuters five big world market themes. These are likely to dominate the thinking of investors and traders in the Global Week Ahead.
(1) The Powell Era Begins at the Fed
Jerome Powell had quite a welcome when he took over the reins of the U.S. Fed on Saturday, Feb. 3rd. It was the day after the initial -2% equity tumble — triggered by jobs data that stoked inflation fears. That data had pushed up bond yields.
The following Monday, Powell’s first weekday in the job, the S&P 500 dropped -4% as volatility spiraled, and then entered so-called correction territory with a -10%-plus tumble before starting to recover.
The question for investors: Whether there will be a Powell ‘put’ for stocks in case things get ugly again. The assumption under previous Fed bosses being that the central bank would always be there to prop up markets.
So far, he has only pledged to “remain alert to any developing risks to financial stability,” and investors hope his debut testimony to Congress will offer clues. Most reckon, however, that he is most likely to reinforce the message from this week’s Fed meeting minutes that inflation and interest rates will continue to rise.
(2) Italy’s March 4th Election Creeps into View
For months, markets have happily ignored the approach of Italy’s March 4th election. Now investors are starting to sit up.
Their creeping nervousness has pushed Italy’s 10-year bond yield spread over German peers to the widest since January, while the cost of insuring exposure to Italian sovereign debt is at its highest in more than five weeks.
Some see pre-election volatility as an opportunity to snap up Italian debt. Others caution against complacency — the election in the Eurozone’s third-biggest economy is expected to produce a hung parliament. And if parties cannot agree on a coalition, fresh elections cannot be ruled out.
Polls point to a strong result for the anti-establishment 5-Star Movement, while Silvio Berlusconi’s center-right bloc could also deliver a surprise. But success for the League, which calls the euro a “failed currency,” will revive euro break-up fears and further widen the gap between Italian and German yields.
(3) Trader Eyes Stay Focused on the Euro
The euro bulls rampaged for most of 2017 and January this year, recently taking the currency to three-year highs above $1.25. But markets have become cautious: There is next weekend's potential double whammy from Italian elections and the German vote on forming a coalition government, while the dollar is finally gaining traction from rising Treasury yields. That has put the euro on course for its second weekly loss in four months.
Currency derivative markets are implying there could be more weakness: two-week implied volatility EUR2WO=FN, a gauge for expected swings in the value of the euro, has risen to levels not seen since the French elections last year. The preference for buying euro puts EUR2WRR=FN, or options to sell at a set price, has also grown. Traders reported strong demand for strikes — the price at which they can exercise the option — around $1.21.
(4) Bank of Korea (BoK) Rate-Setters Meet
To hike or not to hike is the South Korean central bank’s dilemma. At its Feb. 27th meeting, it is expected to hold its main interest rate at 1.5% but could follow up on November’s rate rise — its first in six years — later in 2018.
On the one hand, South Korean households’ record $1.3 trillion debt (90% of GDP) means the bank must do something to discourage further lending.
But raising rates might further boost the won, which is near three-year highs. That is a problem for exporters, the backbone of the economy, who are also grappling with U.S. protectionism; anti-dumping duties have been slapped on Korean steel and transformers, while tariffs have been imposed on solar panels and washing machines.
Inflation, meanwhile, remains below the central bank’s target.
(5) Watch European Banks Earnings Reports
Buying shares in European banks to benefit from “monetary normalization” became a hot trade in early 2017 but withered somewhat as central banks stayed in the slow lane.
But the U.S. Fed is now expected to raise interest rates three times in 2018 and the Bank of England (BoE) possibly twice, while the European Central Bank (ECB) is set to end quantitative easing by the end of the year. So “go long on European banks” is back as a consensus bet among equity strategists.
As longer-dated bond yields rise, banks which borrow short-term money and lend it on longer-term tend to benefit. February’s equity sell-off meant bank shares missed out on the recent rise in yields on 10-year German bonds.
After the UK’s HSBC, Lloyds (LON:LLOY) and RBS (LON:RBS) Barclays (LON:BARC) revealed results, it is the turn of several euro zone banks, with the Bank of Ireland, Allied Irish Banks, Bankia, Erste Group Bank and ABN AMRO (AS:ABNd) all reporting earnings next week.
Their figures should help analysts assess what kind of shape the sector is in, and to pick the stocks likely to benefit most from rising bond yields.
After all, Eurozone banks should benefit from equity portfolios rotating towards cyclical shares to capture the so-called “euro boom.” Economic recovery has also buoyed banks’ retail activity and helped reduce bad loans.
Top Zacks #1 Rank (STRONG BUY) Stock Picks—
The three biggest Zacks #1 Rank stocks — by market capitalization — are as follows:
- Tencent Holding TCHEY: This is a big mainland China Internet services giant. The long-term Zacks VGM score is F.
- Boeing (NYSE:BA) : This is the U.S. aerospace-defense giant. The long-term Zacks VGM score is D.
- NVIDIA (NASDAQ:NVDA) : This is the big U.S.-based semiconductor firm. The long-term Zacks VGM score is D.
As the awful long-term Zacks VGM scores show, any stock buyers here still pay up for growth, even after the latest market correction.
OK, maybe that’s too negative. The scores used to be F, and now they are D!
Key Global Macro—
‘Synchronized Global Growth’ has a new face this week. All week long, focus on the unemployment rates coming out all over the world. They are extremely low in nearly all countries.
Singapore — at 2.2% — is the lowest. Germany is at 5.4%. The only high rate of unemployment is found in Brazil. It could get to 12.5% after this week.
New Fed Chair Powell Alert!
On Wednesday, Powell testifies to the House Financial Services Committee at 10 am ET in a session titled “Monetary Policy and the State of the Economy” during which he will deliver the pre-released semi-annual Monetary Policy Report to Congress.
Powell’s prepared remarks will be released beforehand at 8:30 am ET.
On Friday, U.K. markets will have a keen eye on Prime Minister Theresa May’s speech on her Brexit strategy.
On Monday, the unemployment rate in Singapore gets updated. It is currently at 2.2%. That’s low, low, low. It also shows you how low you can go.
The unemployment rate in Taiwan is 3.7%.
U.S. new home sales will be updated. The prior reading was 625K.
On Tuesday, The Bank of Korea (BoK) issues a rate decision. The 1.5% reference rate is not pegged to change.
The unemployment rate in Hungary is 3.8%.
Brazil’s FGV inflation rate gets updated. In y/y terms, it has been -0.41%. It could get to -0.14%. The m/m rate should rise +0.35%.
The HICP inflation rate in Germany should remain low at +1.4%.
The U.S. Case-Shiller Home Price Index (HPI) gets updated. The national HPI has been running at 6.41% y/y.
The unemployment rate in Mexico may go from 3.13% to 3.5%.
Japan’s retail sales may go from +3.6% y/y to +3.0% y/y.
On Wednesday, China’s manufacturing PMI comes out. The 51.3 reading may get to 51.1.
India’s manufacturing PMI may go from 52.4 to 52.1.
The unemployment rate in Germany gets updated. It is 5.4%.
The Eurozone HICP gets updated. It should stay at 1.3 % y/y.
The National Unemployment Rate in Brazil gets updated. It may go from 11.8% to 12.5%.
U.S. 2nd reading of Q4 GDP comes out. It could go to +2.4% from +2.6% initially.
On Thursday, U.S. total vehicle sales come out. It has been 17.07 million units annually.
The Caixin China manufacturing PMI (the private, small company PMI) may go from 51.5 to 51.2.
The Irish manufacturing PMI gets updated. It has been 57.6.
On Friday, the University of Michigan sentiment index comes out. It has been 99.9.
On March 4th, the Irish unemployment rate comes out. It was 6.1%.
Boeing Company (The) (BA): Free Stock Analysis Report
NVIDIA Corporation (NVDA): Free Stock Analysis Report
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