The rally in stocks globally has run out of steam with prices rebounding to levels that investors believe reflect current economic fundamentals. In the US, the S&P 500 closed down 1% on the week while here at home, the ASX200 finished AT 4,937, down 1.3% on the week.
That weakness could change this week with the start of earnings season in the US. But the analysts at BAML aren’t quite so sure — I got why below.
Elsewhere on markets, crude oil has rocketed higher as traders bet a deal might get done at next week’s OPEC/non-OPEC meeting. Friday’s rally of more than 6% saw Nymex crude close 12.64% higher than the week’s low.
Also moving sharply was the Yen which collapsed to a low of 107.67 before ending the week at 108.03. The Aussie dollar also came under pressure.
Looking at the week ahead, it’s a big one for traders.
In Australia, the big releases are the NAB business survey, Westpac consumer confidence and employment. Internationally, the IMF’s forecasts are out as well as many other important data points.
The Aussie dollar’s rally has ended. The Australian dollar topped out at 0.7721 a little more than a week ago and spent the last week under pressure making a low of 0.7488 on Thursday before closing at 0.7552 at the close of trade in New York Friday.
But the Aussie’s rally is over say the analysts at Morgan Stanley. “We do not believe the Australian economy has turned the corner and expect more weakness ahead, leading to RBA rate cuts and a weaker AUD,” they said in a note Friday. They are looking to sell rallies — given their short term bearish US dollar view — and are targeting a move back to 70 cents.
US earning season begins — can stocks rally? Earnings season in the US kicks off this week and expectations are so downbeat there’s a strong chance that stocks get support from better than forecast earnings.
Not so fast, says the Equity and Quant Strategy team at BAML. They said traders should expect a solid beat, but it may already be priced in.
Analysts have slashed estimates by 9% since the start of 2016, more than double the typical 4% pre-EPS season cut and the most extreme three-month cut since 1Q09. The biggest contributors to the outsized cut have been Energy (where 1Q profits are now slated to be negative) and Financials (amid lower-for-longer rates and a tough capital markets backdrop). We forecast EPS of $27.50, a 4% beat vs. analysts’ $26.36 — better than last quarter’s sub-1% beat but in-line with the average post-crisis beat. A bigger beat this quarter seems reasonable given this year’s dollar weakness, rebound in commodity prices, bounce in the ISM and other industrial indicators, and improvement in global growth. Results from the 22 early reporters also suggest a beat, as more than 80% have beaten on EPS so far. All of that said, overall growth remains tepid and given the 13% rally off the February lows, much of the potential beat may already be reflected in stock prices.
Australian Calendar – (courtesy NAB Economics, our enphasis)
A big week for Australian data, with two of the highest focus monthly data points released — the NAB Business Survey on Tuesday and March Employment and Unemployment data on Thursday (Chart 1 and Chart 2). There’s also Home Loan data (Monday), the latest Westpac Consumer Sentiment survey (Wednesday) with the week rounding out with the RBA’s six-monthly Financial Stability Review which contains, amongst other things, useful charts and commentary on funding and non-performing loan trends for the banks, household gearing and mortgage buffers.
Australia’s jobs data could be another blockbuster this week. The data sample issues the ABS is having with the monthly jobs data look set to continue with the NAB’s market Economics team writing Friday that:
If the incoming sample has the same employment to population ratio as the continuing seven eighths of the sample, then employment growth could be anywhere between 80-100k could result! We have tempered this possibility for our forecast, as of course the incoming sample may not have these characteristics and also because the trend in SEEK job advertisements has been very weak for the past three months in Western Australia (falls of 4-5% each month). That said, the rotation suggests the risks are for a surprisingly large employment increase, though that is not necessarily to say employment growth is strong!
The NAB says it “forecasts a 40,000 increase in employment (Market +19,000, Previous +300). At face value, this would seem a strong employment outcome.”
International Calendar (also courtesy NAB Market Economics)
Global: IMF’s new global forecasts Tuesday, IEA Oil Market Report Thursday, and next Sunday major oil producers are scheduled to meet to discuss a production freeze.
US: Retail Sales Wednesday, CPI Thursday and Uni of Michigan Consumer Sentiment Friday which importantly includes inflation expectations.
Central banking wise, the Beige Book is on Wednesday and a plethora of Fed speakers with voters Dudley on Monday and Powell on Thursday. Major US banks also report Q1 earnings with JPM Wednesday, BofAML Thursday and CitiGroup Friday.
China: GDP Friday along with the key monthly indicators of Industrial Production, Retail Sales and Fixed Asset Investment. Then we get CPI Monday and Trade Balance Wednesday.
Euro: Industrial Production Wednesday and CPI Thursday and Trade Balance Friday.
UK: Bank of England meets Thursday.
Canada: BOC meets Wednesday where consensus is for a hold.
NZ: A very quiet week with electronic card transactions Monday, Food Prices Wednesday and PMI Thursday.