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A New Strategist Game: Global Week Ahead

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A swift global coronavirus pandemic opened up a new, nimble stock strategist game.

How low can S&P 500 earnings go, and how cloudy can the outlook become?

From Zacks' earnings-estimate driven port of call, the Q1 2020 earnings season has already begun.

Including a March 19th release from Cintas (CTAS - Free Report) , we note results from 10 S&P 500 members, including bellwether operators like FedEx (FDX - Free Report) and Adobe (ADBE - Free Report) .

To no one’s surprise, the S&P 500 member reports in hand are muddied and torn by the global coronavirus pandemic.

One clean data point did show up: Costco (COST - Free Report) reported +12.1% same-store sales growth in February, as nervous shoppers stocked up on essential supplies.

March sales growth data from grocers will be gigantic. Toilet paper makers are raking it in. They surely lead the Consumer Staples pack. Ditto hand sanitizers, latex gloves, etc.

By the time the big U.S. money center banks JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) report Q1 results April 14th, we will have results from two dozen S&P 500 firms.

Don’t read too much into forward-looking CEO or CFO statements. Nobody really knows what is going to happen too far out in the future.

China’s Deng Xiaoping once coined a well-honored phrase: “Crossing the river by feeling the stones.” Times full of risk and uncertainty are best handled in this way.

Next are Reuters’ five world market themes, reordered for equity traders.

(1) Are U.S. large-cap stocks cheap or just confusing?

As the U.S. stock market has tumbled, valuations have also come down sharply.

The S&P 500’s price-to-earnings ratio, based on earnings estimates for the next year, has dropped from over 19 times in late February to 14.2 times as of Wednesday, March 18th according to Refinitiv data. This takes the valuation below its historical average.

But the picture is muddied by the fact that earnings estimates may have not come down enough to account for the coronavirus fallout. Just on Thursday, BofA Global Research cut its S&P 500 profit forecast and now projects 2020 earnings to fall -15%.

The picture may become clearer in the coming weeks, as the first quarter comes to an end and companies start preparing their results. Last week, FedEx (FDX - Free Report) and Marriott (MAR - Free Report) walked away from their 2020 forecasts because of the uncertainty.

Nike (NKE - Free Report) , Micron (MU - Free Report) and KB Home KBH are among the U.S. companies due to report results next week.

(2) Here come fresh global PMIs. Ouch!

Few doubt that the coronavirus will tip the world economy into recession as countries around the globe go into lockdown to contain the outbreak. The forward-looking purchasing managers’ index due out in coming days in Europe and the United States will provide an early reading of the scale of the hit financial markets have already been bracing for.

The PMI surveys are typically conducted in the second half of a month and the data in the “flash” survey is usually collected in the week or so before the data is released, so economists reckon next week’s PMIs will provide the most comprehensive overview so far of the coronavirus impact.

It might make for ugly reading. Deutsche Bank now expects Germany to contract between -4% to -5% in 2020; JPMorgan forecasts emerging markets ex-China to slip into recession in the first half and BofA sees global GDP growth dropping to zero this year, matching the major recessions of 1982 and 2009.

Of course, recent days have seen governments and central banks ramp up aggressive easing and fiscal stimulus to buffer their economies — that may provide a silver lining to what is surely set to be a period of dire economic data.

(3) Huge volatility is not just found in stocks, but also bonds and currencies.

In 1971, ex-U.S. Treasury Secretary John Connally bluntly informed his fellow finance ministers: “The dollar is our currency, but it’s your problem.” Half a century on, that still holds true: desperate companies and banks around the world have been stumping up big premia in recent days in their rush to buy greenbacks — for trade, debt repayments, or just to hold.

The liquidity squeeze that saw the financial markets’ plumbing creak prompted the Fed into action: The world’s top central bank said on Friday it would enhance the dollar liquidity swap line arrangements it has with the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank.

To see if that does the trick, watch for the dollar to stabilize — not just in exchange rates, but also in forward swaps that essentially show how much of a premium people are willing to pay for dollars. In euro-dollars for instance, the Fed’s gigantic cash injections have narrowed the spread to minus 10-15 basis points from a whopping 120 bps earlier in the week. Similar on other currency pairs.

If that continues, it should calm down currency markets overall. Implied volatility, a gauge of expected price swings, surged above 15% last week but has since eased to around 12%. (A reminder: vol was below 4% earlier this month). That’s crucial, and not just in currencies, because few investors will venture back in when asset prices are volatile.

(4) Emerging markets pounded, even as coronavirus hits wealthy countries first.

It’s been a rough week for markets, but some emerging market assets have found themselves careering towards the abyss as currencies tumble to fresh record lows, bonds get hammered and stocks are down nearly 10% over the week.

A multitude of pressures has contributed to the pummeling: The strong dollar, a dire global economic outlook, tumbling oil prices thanks to waning demand and a Russia/Saudi Arabia production spat as well as rising borrowing costs.

Investors piling into the greenback have seen enduring stresses in dollar funding markets, with hurried swap lines between central banks earlier in the week doing little to alleviate the credit strains at the heart of the problem.

Central banks in the United States, the Eurozone, Canada, Britain, Japan and Switzerland stepped in again on Friday, agreeing to increase the frequency of their one-week U.S. dollar credit facility.

In emerging markets, policymakers that lack the firepower to support currencies or face challenges to cut rates, will be keeping their fingers crossed that steps taken by major central banks will be enough to end the financial doom loop.

(5) The Tokyo 2020 (or 2021) Olympics?

In Japan, the land where unconventional monetary policy and yield-curve control were born, all eyes are on the Olympics. The torch has landed and many fingers are crossed that the games proceed in July, but fears that the event may be postponed are growing.

A distracted government is still mulling fiscal measures to support the economy, and the Bank of Japan is the only G3 central bank that hasn’t brought out the monetary bazooka so far. All it has done is increase some asset purchases.

Part of the reason may be that it’s been there and done that — with little success. Short-term yen rates are negative, longer yields are anchored and the BOJ would not cut them further so banks’ profits are protected.

The other reason might be the yen, which has been weakening sharply as the pandemic has spurred global investors into hoarding dollars.

Theoretically, Japan should be celebrating yen weakness: It is an exporter, it is the world’s biggest creditor with $3 trillion of net external assets, half its government bond market is in the safe hands of the BOJ, and even the trillions of dollars Japanese investors have parked overseas should be coming back home in such a crisis. But Japan also takes no chances. With an eye on the yen, the rate cuts will come slowly, slowly.

Top Zacks #1 Rank Stocks

During times of broad share weakness, think well mostly of the biggest of the big. Here are three great firms (that are really big in market cap, too).

(1) Microsoft (MSFT - Free Report) : This mega-cap stock is at $137 a share now, making it (barely) to a $1.0T market capitalization. I see a Zacks Valuation score of D, a Zacks Growth score of C, and a Zacks Momentum score of F.

(2) SAP (SAP - Free Report) : Germany is hurting. This is one of its leading computer-software firms. The stock trades at $94 a share now, giving it a $112.6B market cap. I see a Zacks Value score of D, a Zacks Growth score of F, and a Zacks momentum score of F.

(3) Regeneron (REGN - Free Report) : Medical-biomed stocks are holding up OK, relatively speaking. I see this one priced at $438 a share, giving it a $48B market cap. The Zacks Value score is C, the Zacks Growth score is C, and the Zacks momentum score is B.

Key Global Macro

In this global week ahead, the world’s financial risk markets will laser focus on:

    •    Further implementation of the U.S. Fed’s monetary policy initiatives,
    •    Prospective timelines for a U.S. fiscal stimulus package, and
    •    Economic and human ramifications in the ongoing spread of the COVID-19 virus.

Both the U.S. House and Senate will be in session on Monday. Expect developments to move quickly toward passing a roughly U.S. $1.25 trillion stimulus bill.

There is little calendar-based risk across Asia-Pacific markets. Focus will be upon the global spread of the COVID-19 virus and policy responses in North America and Europe.

On Monday, I would be looking for signs of U.S. stimulus bill passage to support stock markets there.

On Tuesday, a batch of Eurozone PMIs arrive. The EU composite should be 39.3, with services at 39.8 and manufacturing at 40.0. Specifically, watch out for the PMIs from Germany (40 expected for manufacturing) and France (41 expected for manufacturing).

U.K. PMIs arrive too. Manufacturing should be 45.0 and services 45.0.

Look out for U.S. new home sales. Consensus has 750K, after a 764K print the prior month.

On Wednesday, the Bank of Thailand should cut an emergency 25 basis points.

We get Argentina’s Q4 GDP data.

On Thursday, ah yes, initial U.S. jobless claims! How high will applications for jobless claims over the past week go when they are released?

The weekly U.S. initial jobless claim tally will begin to inform the magnitude of damage being done to labor markets by the COVID-19 shock. It is among the higher-frequency gauges being relied upon to assess damage to the U.S. economy. Look for a rise to 2 million initial jobless claims with a greater risk of a bigger number than a smaller reading.

A mainland China industrial profits release should be interesting.

The Bank of England (BoE) should go ahead with its previously scheduled meeting. Consensus sees a 0.1% policy rate, a cut from 0.25%.

On Friday, the Bank of Columbia (BanRep) comes out with a policy rate decision.

The U.S. PCE deflator (the Fed’s preferred consumer inflation gauge) is out. I see consensus at +1.7% y/y, with no change expected.

University of Michigan consumer sentiment is out. A 93.3 consensus is better than you may have thought. Prior is 95.9.

Conclusion

There is little else to do for those of us operating under a “shelter-in-place” governance order. So, I hope you liked this version of the Global Week Ahead.

I appreciate having an Internet-centered existence, during novel crises like these. Make sure you order take out or delivery from your local restaurants in the weeks ahead.

Mindset is growing in importance.

So, you like to play football? No matter. We will not be playing football anymore. We are playing basketball. Even if you don’t play basketball, get used to it. Learn to enjoy it.

The next three months, you will play basketball.

 

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