Equities Up on Trade and Brexit, Quarterly Earnings May Fall
Last Week Review
The positive short-term developments on the U.S. and China trade talks as well as the open negotiation between the U.K. and European Union drove global equities higher at the end of last week to a 1.3% return. Non-U.S. developed markets rose the most, followed by emerging markets and U.S. equities.
Trade Talks Lead to Incremental Tariff Hike Delay
Last week began with U.S. discussions of import restrictions on Chinese nationals and a banning of sales to Chinese technology firms. However, optimism began to increase on U.S.-China trade talks throughout last week. A tentative agreement was announced last Friday that included plans for China to purchase $40–50 billion worth of U.S. agricultural goods in exchange for the U.S. delaying the 5% incremental tariff on $250 billion worth of Chinese goods previously set to be implemented on October 15. The agreement is set to be finalized in the next month and could be signed in November. Though some progress was made in the talks, a number of key issues remain unsolved including intellectual property, industrial subsidies, market access and currency practices which makes a comprehensive trade agreement unlikely. Also, the planned U.S. tariffs on consumer goods that will launch on December 15 were not part of the agreement.
Powell Points to Another Rate Cut
Federal Reserve Chairman Jerome Powell announced that the central bank will resume buying bonds to expand the balance sheet. He said that these actions differ from quantitative easing as the short-term Treasury purchases were meant to aid lending rather than stimulate economic growth. Investors saw the announcement as a way to separate the balance sheet from a potential Fed rate cut in late October. Market expectations for a rate cut moved from 69% prior to the comments to above 80% before finishing the week at 71%. In U.S. economic data last week, headline and core Consumer Price Index levels were both unchanged in September with year-over-year figures of 1.7% and 2.4%, respectively.
European Union Believes in Possibility of New Exit Deal
After initially rejecting U.K. Prime Minister Boris Johnson’s Brexit withdrawal proposal, developments late last week led to the European Union allowing for a renegotiation period. The EU and U.K. will continue discussions over the coming weeks including the summit in Brussels beginning October 17. The negotiations are considered a positive development but the fast approaching October 31 deadline means the sides are unlikely to reach a deal so soon. Another three-month extension is the most likely scenario as U.K. law states that an extension must be requested without a secure deal.
This Week Preview
Citigroup, JPMorgan and Johnson & Johnson to Report Earnings
Starting on Tuesday, large banks out of the financial sector including Citigroup, JPMorgan Chase and Wells Fargo will be among the first to report third-quarter earnings. Estimates forecast a 4.1% year-over-year earnings decline in the S&P 500 Index. If this forecast proves correct, it would be the first stream of three negative quarters since the fourth quarter of 2015 through 2016’s second quarter. Other notable companies reporting throughout the week include Johnson & Johnson, Bank of America, American Express and Coca-Cola.
Chinese Data in Focus
Though this week’s China data releases will not reflect last week’s U.S.-China trade agreement, investors will continue to follow the implemented tariffs’ effects on both the U.S. and Chinese economies to determine if either country is more likely to make concessions in future deals given pressures from slowing growth. Economist surveys expect year-over-year decreases to both imports and exports in China and expect industrial production, retail sales and fixed asset investment to remain mostly unchanged from August’s readings. Reviewing trade elsewhere, the U.S. and EU will meet Monday to discuss the tariffs the U.S. plans to impose on Europe starting October 18.
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