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Will Mario Draghi Disappoint Us? Global Week Ahead
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In the Global Week Ahead, the center stage is set. For Thursday. A major act is about to play.
Will the European Central Bank (the ECB) meeting disappoint traders or not?
“We expect an aggressive easing package from the ECB,” said Priya Misra, head of global rates strategy at TD Securities in New York – saying this to the Financial Times.
TD thinks the ECB will cut rates twice, by 0.1 percentage point this Thursday and again at Christine Lagarde’s first meeting as president in December, while announcing €40 billion of new monthly bond purchases.
That should be enough to drive key European bond yields lower still. Ms. Misra expects Germany’s 10-year yield to end the year at -0.8% compared with -0.61% currently.
A smaller package of purchases could disappoint bond investors.
In light of that, here are Reuters’ five world market themes for the Global Week Ahead. These are kept in order of importance to equity markets.
(1) A big ECB meeting ends on Thursday — Draghi’s last.
Bond markets have become accustomed to getting their own way. So on Thursday when the ECB holds one of its most anticipated meetings ever, they will be watching for Mario Draghi, in one of his final acts as ECB chief, to unleash more stimulus to boost the bloc’s stubbornly weak economy and inflation.
On the table are interest rate cuts, a resumption of asset purchases, a pledge to keep rates low for longer and compensation for banks suffering from negative rates. Money markets are positioned for sizable rate cuts between now and end-2020.
The risk is the package falls short — if markets see it as a damp squib rather than the necessary bazooka. Already yields have jumped off record lows after some ECB officials dampened expectations of an aggressive easing package and played down the need to resume bond-buying.
But others argue that if the bank is serious about boosting inflation — below target since 2013 — it needs to deliver more, not less. Failure to do so could trigger a huge bond tantrum, one that makes the recent selloff look like a blip.
(2) Haven’t heard of the Prosus IPO in Amsterdam? It owns 30% of Tencent.
Some good news for investors starved of a high-growth European internet stock — on Wednesday South African e-commerce giant Naspers will float its newly created subsidiary, Prosus, in Amsterdam, an entity valued at over 100 billion euros.
Currently, no European-listed company is able compete with the meteoric earnings growth of the U.S. and Asian tech giants grouped under the FAANG and BAT acronyms. But Prosus’ main asset is a 30% stake in Tencent, one of China’s biggest social media and gaming groups. Tencent is also the T in the BATs cohort (the other two are Baidu and Alibaba). So Prosus could in theory emerge as a Europe-based proxy for Tencent.
But could it also be the P in a yet-to-be-created acronym for a European tech grouping? Prosus will be tiny compared with the FAANGs, which are worth a collective $2.8 trillion. But it would still be Europe’s second-largest tech firm after Germany’s SAP. Its listing will offer a boost to the pan-European tech stocks index, which is currently worth about 430 billion euros ($475 billion).
(3) Watch the U.K. Pound for a bottom. And watch the U.K. for Brexit drama.
It’s been a dreadful few days for British Prime Minister Boris Johnson. He has vowed to die in a ditch rather than delay Brexit but now a three-month postponement looks increasingly likely. His attempt to get Brexit done by Oct. 31 by suspending -- or proroguing -- parliament for a period has effectively been foiled by furious lawmakers and his brother Jo has quit the government over its approach towards policy.
On Monday, parliament returns in force to block Johnson’s second bid to call a mid-October general election.
Then there’s the economy teetering on the edge of recession. The Bank of England sees a one-in-three chance the economy will be shrinking in year-on-year terms by early 2020. All other indicators, from car sales to business investment, have slumped to multi-year lows.
So alongside Brexit developments, markets will be eyeing upcoming data — Q2 growth data are published on Monday, along with figures on industrial output, construction and trade. Tuesday brings employment figures. Any sign of a floor under sterling and the economy will be welcome news for Johnson.
(4) The People’s Bank of China (PBoC) cuts its reserve ratio.
China has just slashed banks’ reserve ratios, meaning lenders will need to keep less cash in hand. That frees up around 900 billion yuan to shore up the economy. The move was anticipated and now the question is: do authorities think more policy easing is needed, and when could more measures be deployed?
The upcoming data dump from Beijing could provide a clue. It will show how the trade war is hitting the world’s No. 2 economy and market expectations are not pretty. Export growth is seen slowing, imports falling and factory-gate prices dropping for a second month running as manufacturers cut prices — and their own margins — to offset tariffs increases and faltering domestic demand. We also get an update on credit, which could recover after last month’s contraction in new loans and social financing.
A truly dire set of data could see the central bank open the monetary policy sluice gates, possibly even before the U.S. Fed gets in another rate cut.
Bulls see Beijing unleashing a ride-to-the-rescue infrastructure boom. Bears only see battle lines hardening and an already-here slowdown that shudders through the global economy for years.
(5) Fresh U.S. retail sales data out this Friday.
Sept. 1st saw U.S. tariff increases kick in on $112 billion worth of Chinese goods imports, bringing the tax up to 15%. Beijing has slapped on retaliatory levies, taking the trade war up another notch. News the two sides are to resume talks in October has soothed some fears but the tariffs will raise the prices Americans pay for some clothes, shoes, mobile phones and other consumer goods — just before the holiday shopping season. Given consumer spending is the U.S. economy’s main driver, that’s a worry.
In the face of slowing exports and investment, shoppers remain a bright spot. U.S. consumer retail sales increased 0.7% in July, surpassing the 0.3% pickup analysts had forecast. So the August figures, due Friday, will be of interest. Forecasts are for a 0.4% increase. But year-over-year growth is predicted at 3.2%, slowing from 3.4% in July.
Ominously, U.S. retailers have been warning investors not to expect too much when they post results in upcoming quarters. To date, 33 companies have issued profit warnings for the third 2019 quarter, while only 15 have delivered positive messages.
Accordingly, analysts polled by Refinitiv have steadily lowered earnings estimates. For the S&P 500, Q3 profits are forecast to decline by 2%; before President Donald Trump’s tariff escalation in early-August, a 0.6% drop had been expected.
Top Zacks #1 Rank Stocks
Softbank (SFTBY - Free Report) : This is a $93B market cap Japanese tech conglomerate. The Zacks Value score is B. Its major Japanese-based business is providing telecommunication services in Japan. But it is a big investor in U.S. tech companies too.
I hadn’t seen it on our Zacks #1 Rank list until now. So I thought I would lead with it today.
Skechers (SKX - Free Report) : This is a major U.S. shoe seller. The stock has a $5.5B market cap with a $35 share price. There is a B for Value and an A for Growth.
Stocks like this will be worth watching on Friday, when the latest U.S. retail sales numbers land.
MasTec (MTZ - Free Report) : This is a $4.8B market cap stocks with a $64 share price tag. It is a major player in the Building Products – Heavy Construction space. I see an A for Value and an A for Growth.
The company's principal business consists of the installation and maintenance of aerial, underground and buried copper and fiber optic cable, underground conduit, manhole systems and relatessed construction for local telephone companies, including Regional Bell Operating Companies.
Can stocks like this deliver in a market where business trade uncertainty is high? It looks like the answer here is YES. Why? It is a fully domestic business, and the underlying need is to get more advanced telco networks built, as quickly as possible.
Key Global Macro
In the USA, we are on the path towards a Sept. 17th –18th FOMC meeting. That policy decision will offer a handful of macro gems.
I would expect another 25 bps Fed Funds rate cut. Keep an eye on the ‘dot plot’ to see if it resists pricing another 4 to 5 rate cuts by the end of 2020.
On Monday, expect Mexican inflation to wane when August figures arrive. From a peak rate of +6.8% y/y in December 2017, inflation fell to +3.8% in July. The August reading is expected to land inside the desired 2 to 4% target range. Consensus is at +3.2% y/y.
On Tuesday, watch for French industrial production data to bounce +0.6% in July after a -2.3% dip the month prior.
There is also an important U.K. update on average weekly earnings and employment change. The U.K. ILO unemployment rate remains low at 3.9%. With Brexit worry ramping, any negative change here could be market moving.
On Wednesday, India’s latest export and import data come out. Will this country be able to avoid an effect from the U.S. trade war with China?
On Thursday, the key ECB meeting ends.
It is expected to result in significant stimulus to counter persistently soft inflation.
Will Draghi be able to twist enough arms on the Governing Council, given opposition to major stimulus from Germany, the Netherlands and France? Is the ECB technically prepared to roll out multiple forms of stimulus, and along what time line?
An ECB deposit rate cut is widely expected. Think about a 10 basis point reduction to -0.5%.
The U.S. August CPI reading arrives on Thursday. Headline CPI should remain unchanged at 1.8%. Core CPI is forecast to tick up one notch to 2.3% y/y.
Peru’s central bank steps up to the plate too. No rate change is expected this time.
Malaysia’s central bank looks to keep policy rates at 3.0% too.
On Friday, U.S. Retail sales are expected to be little changed in August from July. Core sales were up by about +1.0% m/m in July.
Friday’s University of Michigan consumer sentiment metric for September will be closely watched for whether it reacts to rising trade tensions in August.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Image: Bigstock
Will Mario Draghi Disappoint Us? Global Week Ahead
In the Global Week Ahead, the center stage is set. For Thursday. A major act is about to play.
Will the European Central Bank (the ECB) meeting disappoint traders or not?
“We expect an aggressive easing package from the ECB,” said Priya Misra, head of global rates strategy at TD Securities in New York – saying this to the Financial Times.
TD thinks the ECB will cut rates twice, by 0.1 percentage point this Thursday and again at Christine Lagarde’s first meeting as president in December, while announcing €40 billion of new monthly bond purchases.
That should be enough to drive key European bond yields lower still. Ms. Misra expects Germany’s 10-year yield to end the year at -0.8% compared with -0.61% currently.
A smaller package of purchases could disappoint bond investors.
In light of that, here are Reuters’ five world market themes for the Global Week Ahead. These are kept in order of importance to equity markets.
(1) A big ECB meeting ends on Thursday — Draghi’s last.
Bond markets have become accustomed to getting their own way. So on Thursday when the ECB holds one of its most anticipated meetings ever, they will be watching for Mario Draghi, in one of his final acts as ECB chief, to unleash more stimulus to boost the bloc’s stubbornly weak economy and inflation.
On the table are interest rate cuts, a resumption of asset purchases, a pledge to keep rates low for longer and compensation for banks suffering from negative rates. Money markets are positioned for sizable rate cuts between now and end-2020.
The risk is the package falls short — if markets see it as a damp squib rather than the necessary bazooka. Already yields have jumped off record lows after some ECB officials dampened expectations of an aggressive easing package and played down the need to resume bond-buying.
But others argue that if the bank is serious about boosting inflation — below target since 2013 — it needs to deliver more, not less. Failure to do so could trigger a huge bond tantrum, one that makes the recent selloff look like a blip.
(2) Haven’t heard of the Prosus IPO in Amsterdam? It owns 30% of Tencent.
Some good news for investors starved of a high-growth European internet stock — on Wednesday South African e-commerce giant Naspers will float its newly created subsidiary, Prosus, in Amsterdam, an entity valued at over 100 billion euros.
Currently, no European-listed company is able compete with the meteoric earnings growth of the U.S. and Asian tech giants grouped under the FAANG and BAT acronyms. But Prosus’ main asset is a 30% stake in Tencent, one of China’s biggest social media and gaming groups. Tencent is also the T in the BATs cohort (the other two are Baidu and Alibaba). So Prosus could in theory emerge as a Europe-based proxy for Tencent.
But could it also be the P in a yet-to-be-created acronym for a European tech grouping? Prosus will be tiny compared with the FAANGs, which are worth a collective $2.8 trillion. But it would still be Europe’s second-largest tech firm after Germany’s SAP. Its listing will offer a boost to the pan-European tech stocks index, which is currently worth about 430 billion euros ($475 billion).
(3) Watch the U.K. Pound for a bottom. And watch the U.K. for Brexit drama.
It’s been a dreadful few days for British Prime Minister Boris Johnson. He has vowed to die in a ditch rather than delay Brexit but now a three-month postponement looks increasingly likely. His attempt to get Brexit done by Oct. 31 by suspending -- or proroguing -- parliament for a period has effectively been foiled by furious lawmakers and his brother Jo has quit the government over its approach towards policy.
On Monday, parliament returns in force to block Johnson’s second bid to call a mid-October general election.
Then there’s the economy teetering on the edge of recession. The Bank of England sees a one-in-three chance the economy will be shrinking in year-on-year terms by early 2020. All other indicators, from car sales to business investment, have slumped to multi-year lows.
So alongside Brexit developments, markets will be eyeing upcoming data — Q2 growth data are published on Monday, along with figures on industrial output, construction and trade. Tuesday brings employment figures. Any sign of a floor under sterling and the economy will be welcome news for Johnson.
(4) The People’s Bank of China (PBoC) cuts its reserve ratio.
China has just slashed banks’ reserve ratios, meaning lenders will need to keep less cash in hand. That frees up around 900 billion yuan to shore up the economy. The move was anticipated and now the question is: do authorities think more policy easing is needed, and when could more measures be deployed?
The upcoming data dump from Beijing could provide a clue. It will show how the trade war is hitting the world’s No. 2 economy and market expectations are not pretty. Export growth is seen slowing, imports falling and factory-gate prices dropping for a second month running as manufacturers cut prices — and their own margins — to offset tariffs increases and faltering domestic demand. We also get an update on credit, which could recover after last month’s contraction in new loans and social financing.
A truly dire set of data could see the central bank open the monetary policy sluice gates, possibly even before the U.S. Fed gets in another rate cut.
Bulls see Beijing unleashing a ride-to-the-rescue infrastructure boom. Bears only see battle lines hardening and an already-here slowdown that shudders through the global economy for years.
(5) Fresh U.S. retail sales data out this Friday.
Sept. 1st saw U.S. tariff increases kick in on $112 billion worth of Chinese goods imports, bringing the tax up to 15%. Beijing has slapped on retaliatory levies, taking the trade war up another notch. News the two sides are to resume talks in October has soothed some fears but the tariffs will raise the prices Americans pay for some clothes, shoes, mobile phones and other consumer goods — just before the holiday shopping season. Given consumer spending is the U.S. economy’s main driver, that’s a worry.
In the face of slowing exports and investment, shoppers remain a bright spot. U.S. consumer retail sales increased 0.7% in July, surpassing the 0.3% pickup analysts had forecast. So the August figures, due Friday, will be of interest. Forecasts are for a 0.4% increase. But year-over-year growth is predicted at 3.2%, slowing from 3.4% in July.
Ominously, U.S. retailers have been warning investors not to expect too much when they post results in upcoming quarters. To date, 33 companies have issued profit warnings for the third 2019 quarter, while only 15 have delivered positive messages.
Accordingly, analysts polled by Refinitiv have steadily lowered earnings estimates. For the S&P 500, Q3 profits are forecast to decline by 2%; before President Donald Trump’s tariff escalation in early-August, a 0.6% drop had been expected.
Top Zacks #1 Rank Stocks
Softbank (SFTBY - Free Report) : This is a $93B market cap Japanese tech conglomerate. The Zacks Value score is B. Its major Japanese-based business is providing telecommunication services in Japan. But it is a big investor in U.S. tech companies too.
I hadn’t seen it on our Zacks #1 Rank list until now. So I thought I would lead with it today.
Skechers (SKX - Free Report) : This is a major U.S. shoe seller. The stock has a $5.5B market cap with a $35 share price. There is a B for Value and an A for Growth.
Stocks like this will be worth watching on Friday, when the latest U.S. retail sales numbers land.
MasTec (MTZ - Free Report) : This is a $4.8B market cap stocks with a $64 share price tag. It is a major player in the Building Products – Heavy Construction space. I see an A for Value and an A for Growth.
The company's principal business consists of the installation and maintenance of aerial, underground and buried copper and fiber optic cable, underground conduit, manhole systems and relatessed construction for local telephone companies, including Regional Bell Operating Companies.
Can stocks like this deliver in a market where business trade uncertainty is high? It looks like the answer here is YES. Why? It is a fully domestic business, and the underlying need is to get more advanced telco networks built, as quickly as possible.
Key Global Macro
In the USA, we are on the path towards a Sept. 17th –18th FOMC meeting. That policy decision will offer a handful of macro gems.
I would expect another 25 bps Fed Funds rate cut. Keep an eye on the ‘dot plot’ to see if it resists pricing another 4 to 5 rate cuts by the end of 2020.
On Monday, expect Mexican inflation to wane when August figures arrive. From a peak rate of +6.8% y/y in December 2017, inflation fell to +3.8% in July. The August reading is expected to land inside the desired 2 to 4% target range. Consensus is at +3.2% y/y.
On Tuesday, watch for French industrial production data to bounce +0.6% in July after a -2.3% dip the month prior.
There is also an important U.K. update on average weekly earnings and employment change. The U.K. ILO unemployment rate remains low at 3.9%. With Brexit worry ramping, any negative change here could be market moving.
On Wednesday, India’s latest export and import data come out. Will this country be able to avoid an effect from the U.S. trade war with China?
On Thursday, the key ECB meeting ends.
It is expected to result in significant stimulus to counter persistently soft inflation.
Will Draghi be able to twist enough arms on the Governing Council, given opposition to major stimulus from Germany, the Netherlands and France? Is the ECB technically prepared to roll out multiple forms of stimulus, and along what time line?
An ECB deposit rate cut is widely expected. Think about a 10 basis point reduction to -0.5%.
The U.S. August CPI reading arrives on Thursday. Headline CPI should remain unchanged at 1.8%. Core CPI is forecast to tick up one notch to 2.3% y/y.
Peru’s central bank steps up to the plate too. No rate change is expected this time.
Malaysia’s central bank looks to keep policy rates at 3.0% too.
On Friday, U.S. Retail sales are expected to be little changed in August from July. Core sales were up by about +1.0% m/m in July.
Friday’s University of Michigan consumer sentiment metric for September will be closely watched for whether it reacts to rising trade tensions in August.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Click here for the 6 trades >>