- Profits in China set for a deep dive
- EMU economy weaker than hoped
- Investors hope to see a strong NFP report in the US
Asia – investors try to gauge the economic damage
The mainland Chinese bourses returned to work on Monday registering declines of around 8-9%. That’s a steep number but investors remain puzzled about an eventual degree of economic hit. The profits data for December showed a decline of 6.3% y/y even before the virus erupted despite a favorable statistical base from the previous year. This means that Q1 data is set to show profits deep in a red. Right now traders cannot count on any hard data – PMIs and trade data for January are based on surveys conducted before the economy was paralysed so they aren’t very useful. Markets are paying most of the attention to the number of infections to see if the spread slows down (so far it hasn’t). We’ll present additional evidence in our special report later this week.
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Corporate profits in China tumbled in December. Q1 data is set to be much worse. Source: Bloomberg
Key economic event this week: Trade data in China (Friday)
Europe – Q4 was weaker than expected
Just a week ago we reported better than expected activity data from Europe. While we were aware that much of this optimism could fade very quickly given the circumstances in China, we realised last Friday that a reference point was actually even weaker. The Q4 GDP in France and Italy contracted and y/y growth for the whole EMU slowed down further. Coronavirus infections in Germany result from the economic link with China (a Chinese employee who infected their German colleagues). This could increase pressure on companies who have operations in China (or deal with Chinese partners) to freeze them for a time being, which would create additional economic risk. Investors should also be watchful for any signs that EU companies are short in stockpiles of components produced in China.
After a false breakout DE30 tries to defend the 12900 support area. Source: xStation5
Key economic event this week: Industrial output in Germany (Friday, 7:00 am GMT)
US – lack of investments a concern for the US economy
The very same reason that’s been pushing stocks to the highs is a growing concern for the US economy: companies do not invest enough. Why is this good for the stock market? Lower investments help cut the CAPEX and in the short term this helps cash flows and DCF valuations. Companies spend those cash flows on buybacks pushing prices by creating demand for their stocks and by improving the EPS via the denominator. The Q4 US GDP once again disappointed in the capital formation segment and that might not be the case unless business conditions improve. In the short term, the FX investors will focus on the NFP report. Since labour market is a lagging part of the economy and January is statistically a decent month, there’s a chance for the report to produce numbers better than in December when it showed an employment growth of 145k.
January was an average month throughout the past decade. Source: Macrobond, XTB Research
Key economic event this week: NFP in the US and Canada (Friday, 1:30 pm GMT)
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