Monday, 9 April 2018

WILL THE EARNING SEASON STEAL THE SPOTLIGHT FROM TRADE?

Friday’s steep declines in Wall Street driven by weak employment report and a war of words between U.S. & China seem to have been shrugged off in Asia trade. President Trump’s tweets are becoming a little confusing to investors. After threatening to impose tariffs on additional $100 billion of Chinese exports, Trump tweeted that he will always be friends with President Xi and China will take down its barriers because it is the right thing to do.

The trade drama will continue to create noise in the coming weeks, but it will be interesting to hear from the Chinese President at the Boao Forum on Tuesday, where he will likely show his country’s readiness to retaliate, while indicating a willingness to negotiate.

Oil traders will continue eyeing situation in Syria, after the Pentagon denied conducting air strikes on an airport in Homs. The missile strikes came a couple of hours after Trump warned of "a big price to pay", in response to the attack on rebel-held Douma.

While trade tensions and geopolitical risks are likely to keep appetite for risk in check, investors will have new information to digest this week, particularly earnings from big banks and U.S. inflation data.

Inflation data & FOMC Minutes
U.S. Consumer Price Index is expected to increase by 0.1% YoY, to 2.3%. Meanwhile, the core reading is anticipated to hit back the Fed’s target of 2%, after falling short for the past 11 months. The inflation reading along with the FOMC minutes release on Wednesday will probably lead to a repricing of interest rates expectations given any surprise. An upside surprise will likely push U.S. 10-year Treasury yields bonds towards 2.9%, having fallen 17 basis points from its February’s peak of 2.96%.

It’s the Earnings Season
As usual, the U.S. earnings season kicks off with big banks – JPMorgan, Citi Group, and Wells Fargo will report their Q1 results on Friday. According to FactSet, the estimated earnings growth for the S&P 500 in Q1 is 17.1%, marking the highest earnings growth since Q1 2011. More interestingly, 26 companies in the Tech sector issued positive Earning Per Share guidance, well above the 5-year average of 11. With the S&P 500 down 2.6% for the year, I think there will be many buying opportunities, especially if trade tensions abate. The forward 12-month P/E ratio at 16.5 looks much more reasonable compared to a year ago. 

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