Skip to main content
business briefing

Briefing highlights

  • Markets at risk amid shutdown, Brexit
  • What to make of earnings
  • China’s growth slows
  • TSX, loonie at a glance
  • New York closed today
  • Barrick leaves door open to sale of Zambian mine
  • From today’s Globe and Mail

Mad dogs and Englishmen

Noël Coward

Markets haven’t just weathered the dysfunction in Washington and London. They’ve risen far above it.

That threatens to come unhinged, though, amid the stalemates on both sides of the Atlantic.

Add to that concerns over quarterly corporate results, and you've got the makings of even more uncertainty for markets now enjoying a nice bounce in the early going of 2019.

And this promises to be a key week on all three fronts.

Here's a look:

U.S. SHUTDOWN

John Normand, head of cross-asset fundamental strategy at JPMorgan Chase, sees this as a “sleeper issue” for investors, and which “so far is hurting President Trump’s approval rating more than the stock market.”

That, he suggested, is because the 20 or so shutdowns of the past 50 years have ended quickly, with "modest" fallout, such as U.S. stock declines that averaged 2 to 3 per cent and erosion of the trade-weighted American dollar of 1 to 3 per cent.

We're now on new terrain, though.

"This year’s shutdown could become more material for the U.S. economy and markets for two reasons: Its record length threatens spillover to the broader economy through government contractors, for example; and this conflict could soon overlap with February/March political risks around the Mueller report and the debt ceiling debate," Mr. Normand said.

"Dispiritingly, U.S. domestic politics is replacing international risks like the U.S.-China trade war as a potential volatility generator," he added.

Thus, there will be a toll that few envisioned when the showdown between the White House and the Democrats began.

"We, along with almost all others, initially brushed off the economic impact of the U.S. government shutdown, having seen this Kabuki play many times before," said Bank of Montreal chief economist Douglas Porter.

"However, now stretching into a record four weeks, with no off-ramp in clear sight, the costs are beginning to build," he added.

“The early guesstimates that the shutdown could shave perhaps one-tenth from Q1 GDP – maybe two at worst – are running into the stark reality that the end is not nigh. And, crucially, the economic data blind spots will widen as releases [of official government indicators] are heavily delayed. So, ironically, we may not officially know the true economic costs until it is long over.”

Remember that economists are questioning when the expansion ends, so look further out.

"The lesson of this shutdown is that government has ceased to function well in Washington," said CIBC World Markets chief economist Avery Shenfeld.

"Yes, someday soon federal workers will be paid again. But more meaningfully, the default policy outcome from a polarized D.C. will be a fiscal tightening that adds to the slowing of growth in 2020."

BREXIT

"If anything, there is even greater uncertainty," warned BMO senior economist Jennifer Lee.

British Prime Minister Theresa May last week lost the vote on her Brexit divorce deal with the EU, then survived a no-confidence bid.

Next, she returns today with a Plan B, which faces a Jan. 29 vote. This comes, of course, as the March 29 date for Brexit draws closer.

"The possibility that Plan B is rejected is still very high, despite fears of an accidental cliff-edge Brexit, and Brexit fatigue," Ms. Lee said.

"And if it is, there will be another confidence vote, there could be another election, and there could be another referendum," she added.

"But all of that takes time, which the government does not have. What is becoming more certain is that PM May will be asking Brussels for an extension."

Amid all of this last week, markets toughed it out.

"The pound actually finished the week slightly higher (even rising 1.3 per cent against the euro), while the FTSE managed to follow the leaders higher (albeit in a more modest fashion than most major indexes)," said BMO's Mr. Porter, Ms. Lee's colleague.

"The economic impact of the relentless uncertainty is subtle, but U.K. GDP has lagged the euro zone for the past two years, and business frustration all but boiled over following [last] week’s impasse."

How the markets have dealt with this to do date in no way suggests what could happen going forward, warned CMC Markets chief analyst Michael Hewson.

"Just because we’ve hit two-month highs [last] week against the U.S. dollar and the euro doesn’t mean we’re out of the woods, and investors would do well to remember that," Mr. Hewson said of the pound.

“Prime Minister May’s Plan B isn’t likely to look that different to her Plan A when she unveils it [this] week, and in the absence of anything else the U.K. is still on course to leave the EU on March 29. Nothing that has happened in the last few days has changed that.”

CORPORATE EARNINGS

As BMO senior economist Robert Kavcic put it, the bar for fourth-quarter results has been lowered.

"The Q4 earnings season got under way [last] week and, while it's still very early in the proceedings, the early results have been mixed,” Mr. Kavcic said.

“We’ve seen a generally solid performance from the [U.S.] banks, with some headline beats from the likes of Citigroup and Bank of America (though JPMorgan missed for the first time in about four years),” he added, noting some earnings misses, as well.

So get ready for Week Two, with some biggies including IBM, Johnson & Johnson, Canadian Pacific Railway, Ford Motor Co., Procter & Gamble, Bristol-Myers Squibb, Intel, Norfolk Southern, Rogers Communications, Starbucks, Union Pacific and Colgate-Palmolive, to name but a few.

Only 10 per cent of the companies on the S&P 500 have reported so far. Of them, just shy of 80 per cent have topped the profit estimates of analysts, and 56 per cent have bested the revenue estimates.

These are “right in line with historical norms, but running a bit less positive than in recent quarters,” Mr. Kavcic said, noting that expectations were easing before the current run of results even started.

“The consensus bottom-up earnings growth estimate is currently 14.5 per cent, year over year, for 2018Q4, according to Thomson Reuters’ tally, down from 16 per cent at the start of the year and 20 per cent in early October,” he said of the current fourth-quarter expectations.

“Note also that calendar year 2019 growth expectations have been shaved to 6.5 per cent from above 10 per cent in early October. Sequentially, the trend is clearly toward more subdued earnings growth, with these expectations a marked downshift from better than 20-per-cent year-over-year growth in each of the three quarters through 2018Q3.”

As JPMorgan’s Mr. Normand sees it, we’re going to learn a lot as results roll out, and determine where our money should be.

“Behind or alongside political theatre in the U.S. and U.K. is a corporate earnings season that will better inform late 2018’s ubiquitous discussions around peak earnings and the risk-reward of owning either stocks or credit at this stage of the cycle,” he said, adding “there’s almost no doubt” that profits and margins peaked in the third quarter.

Read more

China’s growth slows

Economic growth is slowing in China, though appears to be not as bad as some observers had feared.

Gross domestic product expanded 6.4 per cent in the fourth quarter, down marginally from the third quarter’s 6.5 per cent. Annual growth for 2018, of 6.6 per cent, was the slowest since 1990.

“The latest data suggest that economic growth remained weak by past standards at the end of 2018 but held up better than many feared, in part thanks to a policy-driven recovery in infrastructure spending,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“Still, with the headwinds from cooling global growth and the lagged impact of slower credit growth set to intensify in the coming months, China’s economy is likely to weaken further before growth stabilizes in the second half of the year on the back of expanded policy stimulus.”

Read more

Markets at a glance

Read more
More news
From today’s Globe and Mail

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe