Market Has A Lot To Digest Amid Brexit News, China Stimulus, Bank Earnings

Investors have plenty to digest this morning as their plates are full with the continuing earnings season as the entree, served with a side of news from overseas that could touch on global economic growth.

Bank earnings continued to roll in. Bank of America BAC beat expectations on its top and bottom line as the bank says it benefited from corporate tax relief and rising interest rates. Meanwhile, Goldman Sachs GS also beat revenue and profit expectations, and it was notable that a gain in equities trading revenue offset a decline in bond trading revenue.

That contrasts with JP Morgan Chase’s JPM and Citigroup’s C performance. JPM on Tuesday became the second big bank in a row to report slower trading after C missed on Q4 revenue Monday. 

Broken Brexit?

As earnings season continued, investors were also digesting the news from yesterday that lawmakers in Britain rejected their prime minister’s plan for the nation’s exit of the European Union. Failure to approve a Brexit plan by March 29 could result in a “no-deal” Brexit, and no one is really sure what the economic consequences might be. A no-confidence vote is expected later today. 

As the turmoil across the pond continued, stocks seemed to be taking it in stride, arguablybecause news reports had already suggested the Brexit bill had little chance of passing. More broadly, the market may have already priced in European political uncertainty to an extent and would need more definitive headlines about whether there will definitely be a no-deal exit or not before moving sharply. 

China Stimulus

In a fresh sign that Beijing is moving to shore up the Chinese economy, the nation’s central bank on Wednesday made an approximately $83 billion cash injection into the economy. The move followed comments by China’s premier that raised hopes for possible fiscal stimulus and added to optimism during Tuesday’s trading.

Worries about China’s economy, the world’s second largest, have been mounting recently as the market has seen signs that the economy there could be stumbling, notably in the form of recent data on manufacturing. 

On the trade front, Sen. Chuck Grassley told reporters that U.S. Trade Representative Robert Lighthizer didn’t see progress on key issues last week in talks between the two nations, according to media reports. 

The news flow about the trade war between the world’s two largest economies, whether bullish or bearish, has kept the market on an emotional roller coaster for months amid worries that the dispute could crimp global economic growth. 

Netflix Entertains Market

The communication services sector and the information technology sector were among the best performers on Tuesday. With the 2018 reorganization of the telecom, consumer discretionary and tech sectors, there is a good bit of overlap between technology and technology-enabled companies in the new communications services sector.

Take Netflix NFLX for example. It’s a streaming company and doesn’t make computers like, say, Apple Inc. AAPL, but it’s still lumped together in the technology growth play that is the FAANG trade. But it’s also in the communications services sector. 

So on Tuesday, it wasn’t too surprising to see the whole FAANG group rally, led by NFLX’s more-than 6.5% jump on news that it would raise prices for its streaming subscriptions. 

The news that NFLX is confident enough to raise prices seems not only good for the tech sector but also as a barometer for consumer confidence as well. However, another school of thought might say that paying an extra $2 per month might not be that big a deal regardless of whether the economy is doing well or poorly. Plus, staying in and binge watching TV sounds more like something one might do during an economic downturn and would be a cheaper date than, say, going out to eat.

The difference in performance from the financial sector, which was up just 0.81% Tuesday, and communications services, which tied for the best performing sector with a gain of 1.74%, can serve as a reminder that with the heightened news flow during earnings season investors’ attention can often be divided.

The corporate communication also can help make trading more balanced, as company performance can help mitigate negative news flow. Or good news from overseas can help mute worries over domestic companies.

We’ll have to watch and see which of the continuing themes of 2019 get the most focus in coming days: corporate earnings, Fed policy, the Chinese economy, trade, or Brexit.

Figure 1: Dropping Dollar:The U.S. Dollar Index ($DXY), which tracks the greenback against a basket of other currencies and is pictured here as a candlestick chart, has been on the decline after gaining sharply at the end of 2018. The ramifications of a meaningfully weaker dollar over time include the potential strengthening of overseas markets. Data Source: ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Inflection Point for the Dollar?: It’s arguable that the U.S. dollar is at a pivot point. The greenback rose against a basket of other currencies (see above) last year, helped in part by tax cut-spurred economic and corporate growth in the United States, safe-haven buying amid a topsy turvy stock market, and concerns about global growth as the trade war escalated. The Fed’s four interest rate hikes also helped boost the buck. But much of that scenario seems to be changing. The Fed has telegraphed a more measured approach, and U.S. stocks have been rebounding. Meanwhile, there are signs that the U.S. economy may not grow as fast this year and projections that corporate profits may not be as robust as the first-wave effects of tax reform wear off. 

So if the dollar is at a pivot point and does head meaningfully lower in 2019, what could that mean? For one thing, it may help alleviate some pressure on China and emerging markets. For China, a weaker dollar could help make Chinese investments more attractive, helping policy makers who are already looking toward fiscal stimulus as a means of shoring up their economy without devaluing the yuan. A weaker dollar would also bode well for emerging market countries with a lot of dollar-denominated debt. A falling U.S. dollar could mean that investors and traders might be considering moving some money into developed markets, such as the eurozone, especially if we get more clarity on Britain’s exit from the European Union. That could potentially help to boost their currencies at the expense of the dollar and might contribute to a 2019 where overseas markets could potentially outperform that of the United States. 

Producer Inflation Muted, Too: While inflation has an important impact on both producers and consumers, one advantage producers have is that they can often pass along higher production costs to end buyers. So keeping an eye on what producers pay for inputs can be an important part of Fed watching. At the moment, the Fed has been more dovish in its commentary, saying that it can afford to be patient with monetary policy because inflation is muted. 

As we saw last week, consumer prices in December fell 0.1% month over month and the core consumer price index, which strips out food and energy, rose an as-expected 0.2%. Those benign numbers were reinforced on Tuesday when data showed that December headline U.S. producer prices dropped by a more-than-expected 0.2% while core producer prices fell 0.1% even though a 0.2% rise had been expected. “Producer price inflation is moderating, which will suggest in the market’s mind that consumer price inflation is going to as well,” Briefing.com said.

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