Buyers dip their toes back in though caution remains near the surface.
The chips are up
The circumspect mood that unwound some of the early-January stock advance could be lifting. A clutch of well-received earnings helps. STMicroelectronics pleasantly surprised with quarterly revenue $100m above expectations, a gross margin beat plus resilient margin outlook despite lower guidance. The news revives the battered chip sector and technology more broadly. Still, buyers are also partly attracted by a natural lull ahead of fresh U.S.-China developments before 30th-31st January talks. Also, ECB event risk, in play right now, is not deemed as significant for equities as for rates and FX.
Whilst the earnings season is still in its early stages in Europe and further afield, high-profile regional let downs in the wake of shock warnings from global behemoths like Apple and Samsung keep investors on guard. A coming crunch in global growth is also biting and this is now being reflected in earnings forecasts as shown in the graphic below.
Figure 1: year-on-year earnings growth forecast trend for STOXX Europe 600 companies
Source: I/B/E/S data from Refinitiv
To be sure, the typical dynamic that emerges amid low expectations could certainly come into play, when modest upside surprises are magnified by the weak basis, bringing outsized market reactions. Overall though, we still see the promising risk rally that opened 2019 as on probation. We’re not alone, looking at recent foot dragging by risk-orientated markets over the last 48 hours.
Aussie gives game away
One giveaway that deeper caution remains under the surface is the lack of follow through by risk-sensitive markets, like the yen. Against the dollar the picture is muddied by a stream of softening readings in Japan as well as the BoJ’s inflation forecast cuts and signal that simulative policy is here to stay. But the yen rises against the strong pound and weak euro in typical safe-haven fashion. China-sensitive Australian dollar also barely reacted to the latest incremental stimulus; a $37.83bn medium-term lending facility for some commercial banks. As such, a sickly Aussie complex is intact. Two-year resistance caps the rate whilst a declining 200-week moving average confirms the long-term trend remains negative. Additionally, the usually reliable spread to copper futures has turns ambiguous.
Figure 2: Technical price chart – Australian dollar/U.S. dollar – weekly intervals [24/01/2019 14:29:08]
Source: Refinitiv/City Index
Trade talks key
More broadly, G10 yields are lacklustre overall. A key worry is probably that a lack of clear progress at next week's U.S.-Sino talks could reinstate downbeat assessments of global growth that prevailed late last year. Chances are, bulls will mostly remain corralled until the outcome of next week’s discussions becomes clear. Indeed, cautionary comments by U.S. Commerce Secretary Wilbur Ross about the talks sparked mild jitters that instantly took markets off Thursday’s highs.
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