European equity markets have come to the end of another positive week, driven by a more optimistic tone around global trade, as reports emerge that China and the US might well be making progress in ongoing trade talks.
This appears to be trumping concerns about a darkening of the economic skies over the global economy, which appears to be prompting central bankers to dial back expectations of further tightening measures over the next few months. If anything the narrative has shifted to a pause if you’re the US Federal Reserve, and a loosening of the fiscal reins if you’re the People’s Bank of China, who pumped further stimulus into the financial system this week in reaction to further evidence of a sharp slowdown in the Chinese economy.
This easing narrative could well get another string to its bow in the coming days when the European Central Bank and Bank of Japan meet over the coming days. Both are expected to lean to the dovish side, which in the end is likely to be supportive of stock markets, barring any unpleasant surprises.
The pound is also likely to find itself centre stage as events around Brexit continue to drive volatility. Just because we’ve hit two month highs this week against the US dollar and the euro doesn’t mean we’re out of the woods, and investors would do well to remember that.
Prime Minister May’s Plan B isn’t likely to look that different to her Plan A when she unveils it next week, and in the absence of anything else the UK is still on course to leave the EU on March 29th. Nothing that has happened in the last few days has changed that.
Davos WEF – 22/01
A lot of time, effort and column inches will be given over to the latest annual World Economic Forum for Davos, where CEO’s, politicians, economists and other global influencers gather to discuss how to deal with the myriad of problems that affect global politics and business in an effort to make the world a better place.
Judging by the state of the world right now 10 years on from the financial crisis, and the dysfunctional state of global politics I would suggest that these annual events have achieved the sum total of diddly squat.
China Q4 GDP/retail sales – 21/01
The slowdown in the Chinese economy is likely to be laid bare for all to see in the upcoming week with the release of the Q4 GDP numbers.
At the end of 2018 trade flows slowed sharply with imports and exports slumping sharply, as new car sales slowed, along with sales of luxury goods and electronics. Whether you believe this is part and parcel of the spill over effects of the trade war with the US, the reality is that we are seeing economic weakness elsewhere in the global economy. This would suggest that something more significant is unfolding. Internal demand especially appears to be weakening on a month to month basis and concerns about this may well have been behind the recent decision to ease monetary policy, earlier this month.
While this week’s GDP numbers are expected to come in on the low side, it is the industrial production and retail sales numbers which could move the market more, as these could weaken further with retail sales already at 15 year lows.
Bank of Japan interest rate decision – 23/01
No changes are expected here from the Bank of Japan. In the most recent quarter the Japanese economy slowed quite sharply and there has been precious little since then to change that narrative, particularly since key data since then from Japan’s key export partners has shown that global demand is waning.
UK Unemployment, wages (Nov) – 22/01
Away from the sound and fury of the politics of Brexit the UK economy has been ticking along quite nicely, with unemployment at 42 year lows, and despite some evidence of a slowdown in business investment, and the wails of anguish from the retail sector, wage growth has started to outstrip inflation at an increased rate.
The latest UK CPI inflation data showed that prices were rising at their slowest rate in two years, good news for consumers who have had to deal with a wage squeeze for the best part of two years.
ECB interest rate decision – 24/01
It is hard to overestimate how bad the ECB’s timing is in relation to the end of its asset purchase program at the end of last year. Since the confirmation of that decision in December the outlook for European growth has slowed quite sharply with both Germany and Italy likely to be in a technical recession as of the end of last year.
The ECB has insisted that it remains credible to maintain the pretence that we could see rates rise by “the end of the summer”, which many have construed as being Q4 this year. In reality it seems more likely that the ECB will acknowledge that the economic picture has darkened, and as such will have to change its guidance accordingly, and rule out any possibility that rates will rise this year.
Germany, France flash PMI’s (Jan) – 24/01
It now seems likely that both France and Germany had a poor end to 2018, with French economic activity being disrupted by the gilet jaunes protests, while Germany could well have slipped into recession at the end of 2018.
This week’s January flash PMI’s for manufacturing and services aren’t likely to assuage the concerns of those who feel that the ECB has misjudged the economic mood and it seems quite likely that we’ll get a continuation of the trend that has been in place for several months now.
Earnings Updates
Restaurant Group (LON:RTN) – 24/01
Management of Restaurant Group raised a few eyebrows last year when they paid £550m for rival food restaurant Wagamama, at a time when the sector is undergoing significant cost pressures from rising wages and a more discerning consumer.
The owner of Frankie and Benny’s has found itself at the forefront of speculation that it may have bitten off more than it can chew so to speak as short sellers pile in to bet against the business.
The shares have slid over 20% since the highs in October and while we’ve seen a modest rebound, 2019 is likely to be much more challenging than 2018. For the moment the omens look positive with Wagamama seeing a 10% rise in like-for-like sales at the beginning of this year. This week’s post close trading statement could reinforce this positive narrative ahead of the company’s final annual results which are due on the 6th March.
Microsoft (NASDAQ:MSFT) Q2 – 24/01
Microsoft’s ability to re-orientate its business model away from its Windows suite of products has been one of the success stories of the last few years. The success of Azure, its cloud computing services division as well as Office 365, saw revenues rise 47% in Q1, while margins also increased as well.
It still remains behind Amazon (NASDAQ:AMZN) in its cloud business and there is some evidence that the pace of revenue growth is slowing, however sales from its computing and gaming division have helped offset some of this, with Xbox console sales driving some of the strongest gains.
On the gaming side the upcoming Q2 sales will cover the Christmas period which generally tends to be a good period for technology companies as discretionary spending tends to spike. Expectations are for profits of $1.09c a share, slightly down from the $1.14c seen in October.
Ford (NYSE:F) Q4 – 23/01
The US carmaker has been in the news a lot so far this year, due to its restructuring plans which it announced for its European operation, and resultant job losses in Germany, Spain and the UK.
While it is inevitable that you’ll get the usual Brexit related excuses the reality is that Ford has struggled for years to turn a profit in Europe, while widespread global changes in emissions rules and a tougher trading environment have also taken their toll. Concerns over trade tariffs has forced as well as slowing demand out of China has prompted all car companies to look at ways to save money. Amongst some of these has been the possibility of collaboration with competitors in an attempt to drive down costs.
Talk of a partnership with VW (LON:0P6N) is amongst some of the ideas being touted by Ford Europe CEO Jim Hackett as the company looks to announce Q4 profits of $0.32c a share.
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