Market themes for the week ahead
The Oracles Speak
Geopolitics overshadowed monetary policy for the first time in many months in early January. But such distractions tend to be short-lived nowadays, with investors getting back to central bank-watching swiftly.
Rate-setters in many countries are about to hold their first policy meetings of 2020 - in Japan on Monday and Tuesday, Canada on Wednesday, Norway and the eurozone on Thursday. On Friday, China sets loan prime rates. In emerging markets, Indonesia and Malaysia bear watching on Wednesday - will they follow Turkey and South Africa by easing policy?
Japan, Canada, Norway and the European Central Bank (ECB) are not expected to make any changes, while it is unlikely China will act again so soon after its early-January reserve ratio cut for banks. The ECB, however, will launch its first strategy review since 2003 to rethink an inflation goal that has not been met for seven years.
Asset manager Pictet reckons at current prices, global stock markets have already priced over $2 trillion in central bank stimulus this year. But it predicts authorities will provide less than that, disappointing investors. So what policymakers say or signal at the meetings could well set the tone for equity markets, which have resumed scaling record highs.
Graphic: Policy liquidity flows by major five central banks
Davos Man
Now that US President Donald Trump has dealt with China on trade for now, it is probably a matter of time before his wrath falls on Europe. On Tuesday, he gets a platform to express his views, speaking at the Davos World Economic Forum.
While signing the Phase 1 deal with China, Trump already griped at having to "pay for our money" in a swipe at the euro zone's negative borrowing costs. He also blames the "too high" dollar for the huge US current account deficit. A currency war risk therefore may not be too remote, especially in an election year. And remember, the Treasury already lists Switzerland, Germany, Italy and Ireland as suspected currency "manipulators" - all have trade surpluses with the United States.
Trump will not be short of sparring opportunities at Davos - some 53 heads of state are to show up in the Alpine resort, including Germany's Angela Merkel. There will be 35 finance and 30 trade ministers. And given the green focus of this year's summit, 17-year-old climate activist Greta Thunberg will attend. It is unclear if her paths will cross those of Trump who is well known for his scepticism over climate change and has advised Thunberg via Twitter to "chill, Greta, chill".
Graphic: US trade deficit
PMI On BOE Radar
Friday brings "flash PMIs" in many countries - advance readings of purchasing managers' business activity indexes. While the euro zone figures will be scrutinised to get a measure of economic recovery, British PMIs will grab more attention, given they comprise the last key data release before the Bank of England's (BOE) Jan. 30 meeting.
A poor number, coming on top of a string of dismal data, could seal the case for easing policy immediately. As recently as Jan. 10, markets saw a 20% chance of a BOE move this month but on Jan. 13 that probability leapt to 50% and is now above 60%. Falling gilt yields and sterling also imply investors are bracing for a rate reduction.
Of course, those moves could be reversed if PMIs surprise to the upside. But a modestly positive reading may still not deter the bank from cutting rates this month. In any case, lower British interest rates are fully priced for May.
Graphic: Will flash UK PMI seal case for Jan rate cut?
Watching Netflix
When Netflix, the first of the so-called FAANGs (Facebook, Amazon, Apple, Netlix and Google), reports Q4 results on Tuesday, investors will want to see how the streaming giant is coping with a wave of competition led by another entertainment heavyweight Walt Disney Co.
Launched last April, Disney+ looks like the most dangerous challenge yet to Netflix's dominance of an increasingly crowded video streaming market. Netflix shares are down about 8% since then, hit by worries over slowing subscriber growth and the costs of high-budget productions such as The Crown and The Irishman. Disney+, on the other hand, has risen 24%.
Other competitors are on the horizon. Apple's new streaming service costs $5 per month, less than half Netflix's monthly standard price. And AT&T will launch HBO Max in 2020.
Investors expect the stock to be volatile. Netflix options imply a 7.6% swing for the shares in either direction by next Friday, Jan. 24. Over the last eight quarters, on average, the shares moved 6% after the company reported results, according to Trade Alert.
Graphic: Netflix vs Disney
Europe Inc Turning Page
European equities have endured a nine-month long profits recession but relief may be coming - I/B/E/S Refinitiv estimates show STOXX 600 companies in line for 2.5% earnings growth in the fourth 2019 quarter.
That is the good news. The bad news is markets are already at record highs, and that is after a 24% rally last year. Probably central banks' stimulus helped, alongside better Brexit and global trade headlines towards end-2019. But it does imply there is little fuel in the tank for further market gains. Currently, forecasts are for 2.5% profit growth in Q4 but that is already more than halved from two months ago.
For 2020 as a whole, 8.8% growth is expected but again, subject to revisions. And while valuations are less exalted than US peers, at 15 times forward earnings, they are hardly cheap.
Sluggish economies mean challenging times for retailers, autos and banks. But turnaround expectations will be tested in coming days when lenders UBS, ING and Bankinter report, while semiconductor makers ASML and STMicro could show if the tech sector is starting to recover.
Graphic: Europe 2020 earnings growth outlook
