Notable events over the last week
- The PBoC Governor Zhou Xiaochaun addressed markets on Friday morning in a bid to challenge the negative sentiment surrounding the Chinese stock market. The message came after the Shanghai Composite Index tumbled 6.4% on Thursday, as markets around the world rallied. Zhou noted that ‘China, still has some monetary policy space and multiple policy instruments to address possible downside risks’ yet reiterated that there was no basis for persistent renminbi depreciation and that the exchange rate will reflect the economic fundamentals in the long term. The rhetoric has changed little since August but the government is becoming more focused on addressing the media misconceptions.
- In the US, Friday brought good news after disappointing data earlier in the week. US durable goods orders bounced back in January after a sharp drop in December. Headline orders rose better than expected +4.9% MoM (vs. 2.9% expected). Encouragingly, core capex orders, a proxy for capital spending by companies, rose a robust 3.9% (vs. +1.0% expected). This was also followed by a revised up annualised Q4 GDP growth to +1.0% QoQ (vs. +0.4% expected) from the previous estimate of +0.7%, yet still lower than the 2% pace set in Q3. Growth during the quarter was impacted by a slowdown in net exports and revised on the back of an upward adjustment to business inventories. For the full year, gross domestic product rose 2.4%, matching 2014’s growth rate.
- As noted above, the picture of the US economy painted earlier in the week was not as favourable. The consumer confidence index declined 5.6pts to 92.2 (vs. 97.2 expected) in February the lowest level since February 2014. This was followed by a decline in the February flash PMI figure which dipped unexpectedly into contractionary territory for just the second time since 2009. The index dropped 3.5 pts in January to 49.8 (vs.53.5 expected). The reaction to the data was mixed with the poor winter weather being attributed as a major factor.
- Last week also offered a contrasting narrative from Federal Reserve officials alongside the volatile data prints. Kansas City Fed President George argued that recent data did not suggest a fundamental shift in the US outlook and that a March move ‘absolutely should be on the table’. Dallas Fed President Kaplan reiterated the need to remain patient while leaving all options on the table and made special mention of the possibility of Brexit, noting that it is another potential tail risk that the Fed needs to keep a close eye on. Meanwhile, Vice Chair Fischer said it was too early to assess the impact of recent market volatility on the US economy, but noted that ‘if the recent financial market developments lead to a sustained tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the US’. Investors have taken a similar dovish stance, pricing out a Fed rate hikes until late 2017, with the probability of the March rate rise currently at 10%.
- Oil had another volatile week as both Saudi Arabia and Iran spooked markets. Saudi’s Oil Minister, Ali al-Naimi, noted that freezing output at current levels is the most likely result of the March meeting however warned that this should not be seen as a production cut. Al-Naimi added that even if production cuts are agreed to in principle, they will likely not be implemented, as ‘there is less trust then normal’ between the two nations. Iran’s Oil Minister Zanganeh fuelled fears further suggesting that the Saudi-Russia freeze plan was ludicrous and puts ‘unrealistic demands’ on Iran.
- Lastly PMI data out from Europe this week was largely underwhelming. The flash February Euro area composite was down 0.9pts and more than expected this month to 52.7 (vs. 53.3 expected), the second consecutive monthly decline and lowest in 13 months. This was primarily driven by the manufacturing print which fell 1.3pts to 51.0 (vs. 52.0 expected), although services was also slightly lower, dropping 0.6pts to 53.0 (vs. 53.4 expected). Regionally it was the weakness in Germany which stood out with the manufacturing print down 2.1pts to 50.2 (vs. 51.9 expected), marking a 15-month low.
Q4 2015 earnings season update
The Q4 reporting season is in the final stages in the US, with 90% of companies having reported, and is close to completion in Japan. Europe is halfway through their season with 56% of companies having reported results so far. Of those, half the sectors in Europe and a majority of sectors in the US and Japan delivered negative Q4 EPS growth. Consumer Discretionary stands out as the only sector recording positive and above-market growth, for both earnings and sales, in the three regions.
Concentrating on the US and 75% of S&P500 companies beat EPS estimates. Despite this, the Q4 EPS growth is the lowest since 2009, printing at -7% YoY but relatively better -1% ex-Energy. Top-line delivery is relatively soft with only 46% of the companies beating sales estimates, with revenues down 4% YoY and flat ex-Energy largely reflecting the translational impact of a stronger dollar.
Coming up this week (Source Bloomberg)
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