What Matters this Week (and a Few Things from Last Week)
Updated: Jul 19, 2020
The Market Last Week: Equity index returns on the major exchanges last week were mixed, with the U.S. S&P 500 and the Euro STOXX 600 continuing to outpace the Japanese and British stock markets. The return on the Nikkei 225 is about flat , and the return on the FTSE 100 has been negative YtD.
The Shanghai composite index is down 4.4% YtD, as the Chinese economy and the stock market continues to suffer from the economic consequences of the Coronavirus.
There were another slew of earnings releases last week also driving the direction of the market, especially in the U.S. I have discussed last week’s earning in a bit more detail further below. As far as economic news:
U.S. retail sales for January, released on Friday, were +0.3%, somewhat lacklustre but in line with consensus expectations.
According to the University of Michigan consumer sentiment survey, U.S. consumer sentiment improved again last month, nearly reaching its post-Great Recession high. This illustrates the optimism driving U.S. consumers, the underlying catalyst driving the U.S. economy. Here’s the history of consumer sentiment in the U.S.:
U.K. 4Q2019 GDP was released last week by the Office of National Statistics and was flat. The 0% growth was in line with expectations. FY2019 growth was 1.4%. The economy in the U.K. continues to feel fragile, as the U.K. embarks on its post-BREXIT existence.
The Eurozone and EU27 released flash 4Q2019 GDP results on Friday. Both economic zones grew an aneamic 0.1% in 4Q2020. FY2019 growth was 0.9% for the Eurozone and 1.2% for the EU27.
This week, the U.S. markets are closed on Monday because of President’s Day, so things will start slowly. Key data releases this week that could drive the market include:
U.S.: PPI, jobless claims and existing home sales in the U.S.
U.K.: unemployment, CPI and retail sales
Japan: 4Q GDP (released overnight and bad, declined 6.3% QoQ, see link) and CPI
The G20 is meeting this week in Rhyadh. The IMF has said ahead of the meeting that the global economy needs more structural reforms and fiscal measures (which I read as “fiscal stimulus”) to ensure growth doesn’t slow further, especially since monetary policy is largely impotent in many economies. Related, most banks - along with the IMF - seem to think that the Coronavirus will shave 0.1% - 0.2% off of global GDP growth in 2020. The Chinese government has or is likely to unveil a healthy dose of monetary and / or fiscal stimulus soon, in order to counteract the drag on the economy caused by Coronavirus.
Earnings – Last Week and What’s Ahead: According to Refinitiv, 387 companies in the S&P 500 that have reported earnings so far. For those companies that have reported, 4Q19 earnings have been +2.6% better than the same quarter the prior year (and would have been +5.5% better excluding the energy sector). 71.6% of companies have reported earnings above analyst expectations, and about two-thirds have beat revenue expectations. The utilities and financial services sectors have had the best earnings growth, and the energy sector the worst. The Refinitiv report is here - it’s short and worth a read, because it is current and also provides 1Q2020 outlook. Below are earnings from a few companies that reported last week.
The week ahead brings earnings from, amongst others, BHP Billiton, HSBC, Walmart, Glencore, Petrobras, Berkshire Hathaway and Pepsi.
The growing similarities between The White House and 10 Downing Street: With the cabinet reshuffle last week under Prime Minister Boris Johnson, the management styles of President Trump and PM Johnson are converging. The resignation of Sajid Javid, Chancellor of the Exchequer, as part of PM Johnson’s cabinet reshuffle last week caught many people off guard. The U.K. press attributed the sudden departure of Mr Javid to in-fighting (involving senior advisor Dominic Cummings) and appears to be an effort by the prime minister to bring the treasury function more under his thumb. You can read more about Mr Javid’s departure (replaced by Richi Sunak) and the entire cabinet reshuffle in the BBC. Sound familiar? It should, because the persistent reshufflings and sackings have been a feature of the Trump Administration since Mr Trump took office. Boris Johnson seems to be looking across the pond with much admiration, probably because he’d love to have the economic success in the U.K. that Mr Trump has had in America. I suppose that it is hard to deny that this sort of “managed chaos” keeps members of the cabinets in both Washington and London very much on their toes, and it ensures that their interests remain fully aligned with that of the president or PM. But the style is unconventional and doesn’t seem very conducive to constructive debates or alternative views. It feels like a “poke in the eye” of a democratic government to me, but so be it – the leader of a country has the right to pick his team, and rotate it is he sees fit. Related, the currency market liked the U.K. government changes, as traders believe that a more aggressive fiscal stimulus package could be unleashed in the upcoming budget due March 11th (although talk over the weekend surfaced that the budget might be delayed). Arguably, the U.K. economy needs something to get it moving forward again. Who cares anymore about government debt and budget deficits anyway?
U.S. Politics – The New Hampshire Democratic primary: The New Hampshire primary came and went without the drama of the Iowa caucus, and Bernie Sanders emerged as the winner, with Pete Buttegieg second and Amy Klobuchar third. Joe Biden and Elizabeth Warren were behind these three. It feels a bit like Joe Biden is fading. Could he end up being the Democratic version of Jeb Bush for the Republican party in 2016? Looking ahead there is the Nevada caucus on Feb 22nd, the South Carolina primary on Feb 29th, and then “Super Tuesday” on March 3rd which will largely define who will be left standing amongst the Democratic candidates. Super Tuesday will also provide the first real look at the legitimacy of Michael Bloomberg, who has been lurking around the edges. I have heard several pundits try to dismiss the similarities between far-left candidate Sanders and far-left (former) Labour leader Jeremy Corbyn. I think they are entirely wrong for being so cavalier about the obvious similarities, but time will tell. As an aside, Bloomberg ran an updated article on Friday entitled “A Guide to Democrats’ Plans to Tax the Rich More”, which is a good summary of some of the ideas being discussed by Democrats to raise taxes. Sovereign bond yields: Perhaps it should be no surprise that in a time of massive central bank liquidity, the market is very much risk-on and sovereign yields of most countries are continuing in one direction, and that’s down. Two good examples last week were secondary yields on Greek government bonds and the yield on the 30-year US Treasury bond auctioned last week. Let’s talk first about Greece (B1/BB-). Yes, this is the country that was on the brink of bankruptcy not many years ago and has restructured its debt three times since 2010. Shockingly, the yield on the Greece Govt Bond 10 Year Acting as Benchmark composite on Bloomberg fell below 1% last week. Here’s the journey over the last five years. (And the graph is correct - the yield on the 10-year Greek bond composite was 14.63% in mid-2015, less than five years ago!)
The economic metrics in Greece are not good albeit heading slowly in the right direction. The unemployment rate in stubbornly high at 16.5% (November 2019) and debt-to-GDP remains around 180%. If a yield below 1% on 10-year non-investment grade rated bonds for a country with these sorts of metrics isn’t an example of risk-on run amuck, then nothing is! The quest for yield extends across all bond markets, and we can also see this in the U.S. government bond market. The U.S. Treasury auctioned $19 billion of 30-year bonds last week offering investors a yield of 2.061%, the lowest yield on a 30-year bond in U.S. history.
MSFT / AMZN contract dispute for JEDI: Last Thursday, a federal judge issued a temporary injunction against the Pentagon’s Joint Enterprise Defence Infrastructure (JEDI) cloud contract, preventing the contract from moving forward until the court reviews the lawsuit from Amazon. JEDI is an effort by the Department of Defence to improve its ability to access and share its data in the cloud and update its antiquated systems. If you recall, the Pentagon had awarded a $10 billion, 10-year contract to Microsoft in late October 2019, which was a surprise to many because Amazon Web Services is the industry’s dominant player and was presumed to be in a position to win the contract. Amazon is claiming that the Trump Administration influenced the Pentagon in awarding the contract to Microsoft, because of President Trump’s personal feud with Jeff Bezos who also owns The Washington Post, a newspaper often critical of the administration and the President personally. The real loser is the US Department of Defence, who is blocked now from updating its cloud technology until the lawsuit is resolved.
Other stuff: Lebanon remains on the cusp of default as investors position themselves in anticipation of a debt restructuring; activist shareholders are increasing pressure on Softbank (Elliott Management has accumulated a 2.5% stake and wants Softbank to take actions to increase shareholder value) and Netflix (Greenlight Capital (David Einhorn) increased short position in late January); Coronavirus cases (71,331) and deaths (1,775) continue to increase.