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January 18th, 2019

Earnings Season

By PRATTE

Blogue dec 1 EN

A week still marked by the many trade disputes that are ongoing. Also, earnings season started this week affecting the markets while the abrupt rejection of the vote on the Brexit exit agreement sent a wind of uncertainty in the UK and global markets. Here is what happened on the markets this week.

Market Brief

After several good sessions last week helped by renewed optimism on trade relations, the markets started the day Monday down. A decline in China’s trade surplus affected global stock markets as the news are worrying investors regarding the global economic growth. “Concerns about a slowdown in global growth are back and this justifies profit-taking,” responded Patrick O’Hare of Briefing.

On Tuesday, investors remained cautious, eagerly waiting for the Brexit vote. The Dow opened lower pulled down by JP Morgan, who lost 1.1% after disappointing quarterly results. Nasdaq open up 1.1% and the S&P 500 gained 0.5%. Netflix jumped 6% at the opening after announcing a rise in its monthly rates while Apple, Amazon, Facebook and Alphabet were up more than 1% each.

US indices opened higher on Wednesday, supported among others by Goldman Sachs (+ 3.9%) and Bank of America (+ 5.2%), both of which posted good quarterly results. After closing with gains on Wednesday, Wall Street opened down on Thursday as Wall Street affected by disappointing earnings from Morgan Stanley (-5.43%). Stocks opened positive on Friday helped by a possible slowdown in the trade dispute between China and the United States.

The TSX ended Monday’s session up 0.24% helped by Chorus Aviation (+ 15.1%) Canopy Growth (+ 11.2%) and Goldcrop (+7) , 5%). The Toronto index has had a good start to the year, up 4.6% since January. Tuesday, the TSX opened up, reaching 15,000 points for the first time since December 7. The Toronto index opened slightly higher on Wednesday, helped by stocks from the banking sector. After nine straight sessions, the TSX started the day down 0.21% on Thursday.

Chinese Trade Surplus

For a second year in a row, China’s trade surplus is down 16.2%. In 2017, its trade surplus dropped by 17%. This decline is due to a 15.8% increase in imports while exports have only increased by 9.9%. “Exports to the United States fell by 3.8%. This suggests that the impact of US customs surcharges intensified in December, as the truce intervened and reduced the urgency to import before further tariff increases for US companies, “said Julian Evans-Pritchard, from Capital Economics in a note, “But the custom surcharges are not responsible for everything. Exports to the rest of the world have also slowed, and studies reported weaker global demand by the end of 2018, “he added.

In fact, China reported a 4.4% drop in exports in December. In addition, China has announced a new record trade surplus with the United States of $323.32 billion, the largest in over a decade with Washington. Thus, the United States is overwhelmed with Chinese products since the last months. The second-largest economy in the world is showing signs of an economic slowdown, which is causing worries among analysts regarding global growth in 2019.

Brexit

The crucial vote on Brexit took place last Tuesday at the British Parliament and it was a brutal rejection of the exit agreement by 432 against 202 deputies. “This is the biggest defeat ever experienced by the executive in Parliament,” said Anand Menon, a researcher at King’s College London, interviewed by AFP. Just weeks before the official release date of March 29, there is a climate of uncertainty in the United Kingdom. Conservative Prime Minister Theresa May has until next Monday to present a plan B. The country has been divided since the popular Brexit referendum that took place in June 2016 and tension is mounting in economic and financial circles.

The European Union is the main partner of the United Kingdom and the country has a trade deficit of £67 billion with the United Kingdom as well as with the majority of the other member countries of the Union. The OECD (Organization for Economic Co-operation and Development) adds that “the lack of clarity about the future relationship between the United Kingdom and the European Union or the prolongation of the transitional period and the resulting uncertainties could encourage companies to defer their investment plans further. On the other hand, the prospect of maintaining as close economic relations as possible with the European Union would result in stronger than expected economic growth .”

Earning Season

As several analysts had predicted, fourth-quarter results should be lower than previous ones. Several investors have revised their expectations down for this quarter; back in September they predicted an increase of 18% of earnings per share, the forecast is now estimated at 10.6%. In fact, more than 72 companies in the S&P 500 have already announced that their results will be down for the fourth quarter.

In addition, many believe that this trend will continue in 2019 due to, among other things, an economic slowdown, a rise in the US dollar and falling prices for black gold. Being one of the most important sources for the market to strengthen, this decline in forecasts for the upcoming quarters worries investors. Apple is a concrete example of this sudden decline after the company reduced its revenue forecast for the first time in nearly 20 years, due to a weak demand in China. In short, this season of quarterly results will be one to watch as analysts attempt to decipher growth signals in the disclosure of results.

Royal Bank of Canada
Canada’s largest bank announced this week that it was lowering its five-year fixed-term mortgage rates. “RBC is the largest mortgage lender in Canada, so whenever they move their mortgage rates, we can expect that the other four banks will follow suit,” Laird said. RBC lowered its five-year “special offer” mortgage down to 3.74 percent, a cut of 0.15 percentage points.
This decision comes as the five-year Government of Canada bond yield has declined sharply since last November. In fact, five-year bond yields went from 2.46%, their last peak on November 8th to 1.93% on Wednesday, a drop of more than half a percentage point. Banks base their fixed mortgage rates on government bond yields. The impact on consumers should be small.

 

 

Pratte Portfolio Management is registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).

This newsletter is solely the work of the author for the private information of clients. The views (including any recommendations) expressed in this newsletter are those of the author alone, and are not necessarily those of Pratte Portfolio Management.

The information contained in this newsletter is drawn from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, nor in providing it do the author or Pratte Portfolio Management assume any liability. This information is given as of the date appearing on this newsletter, and neither the author nor Pratte Portfolio Management assume any obligation to update the information or advise on further developments relating to information provided herein. This newsletter is intended for distribution in those jurisdictions where both the author and Pratte Portfolio Management are registered to do business in securities. Any distribution or dissemination of this newsletter in any other jurisdictions is prohibited. The holdings of the author, Pratte Portfolio Management., its affiliated companies and holdings of their respective directors, officers and employees and companies with which they are associated may, from time to time, include the securities mentioned in this newsletter.

 

 

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