New fronts. Equity markets sold off yesterday on news that Trump was proposing new tariffs on the EU and a lowered global economic growth outlook by the IMF. With the possibility of a new front in the trade war looming stocks gave up their winning streak in a day of selling.
WHAT YOU NEED TO KNOW:
1) The global economy is slowing. Yesterday, the International Monetary Fund released its World Economic Outlook and revealed that it lowered its 2019 global GDP growth forecast to +3.3% from +3.5% versus last year’s +3.6% growth. On the brighter side, they expect that growth may pick up a bit in the second half of the year as a result of central bank easing measures.
2) The trade battle continues. As reported here yesterday morning, an early morning Trump tweet regarding the levying of $11 billion in tariffs on the EU sparked a selloff in equity markets. The EU economy, which is currently limping along, stands to get the brunt of the pain however countermeasures can affect US companies who sell goods in the Eurozone. Though it is too early to tell if this is mere saber rattling ahead of a negotiation, the threat of an expanded trade war made investors nervous, adding a new unknown to contend with.
3) Brexit is probably not gonna happen soon. With both sides deadlocked and Parliament passing window dressing measures, PM Theresa May met Euro-leaders to ask for an extension to keep Britain from crashing out of the EU at the end of the week. Though an extension will be voted on today in Brussels, it is largely expected that Mrs. May will receive her extension which may go through the end of the year or even further. Meanwhile the UK will release its GDP this morning and it is expected to show a surprising growth for the quarter despite all of the disruptions caused by the ongoing Brexit battle.
Gloomy global economic forecasts and fear of another trade war made investors nervous yesterday causing a selloff, though many contend that the news was just an excuse to sell ahead of what is expected to be a weak earnings season. First quarter earnings season officially kicks off later this week with JP Morgan Chase and Wells Fargo releasing their earnings on Friday, amongst others. Though analysts have been adjusting down their 1Q estimates after weak guidance given in the 4Q18 results, there may still be some surprises in the releases. While investors have been prepped to expect a slowdown in earnings growth, the recent behavior in the markets suggest that investors are expecting growth to pick up again beyond 1Q, so any negative guidance in the upcoming releases could cause some indigestion for overbought stocks. Yesterday, the S&P 500 fell by -0.61%, the Dow Jones Industrial Average gave up -0.72%, the Russell 2000 slipped by -1.22%, and NASDAQ 100 sold off by -0.41%. Bonds climbed modestly and the ten year treasury yield slipped by 2 basis points to 2.50%. The 3 month / 10 year yield curve remains positive, flattening by 2 basis points to +8. Ten year treasury yields, which were as high as 3.23% as recently as last November, have fallen precipitously as bond investors began to buy longer maturity bonds on fears of a looming recession and the potential for the Fed to begin cutting interest rates. The move down in yield prompted increased buying in other income instruments as well. Most notable is the surge in demand for Utility Stocks (an equity-based bond proxy) and REITS. REITS specifically have enjoyed a recent surge topping off an epic climb after the financial crisis in which the Dow Jones REIT Index grew by 454% while the S&P 500 expanded by +260% over the same period. Real Estate Investment Trusts are the topic for today’s geek-out Wednesday report, which you can find in the attached PDF.
WHAT TO LOOK FOR TODAY:
This morning, the Bureau of Labor Statistics will release consumer inflation numbers in its CPI report. CPI is expected to show that consumer prices grew slightly last month for a year over year growth of +1.8% versus February’s +1.5% growth. Excluding food and energy, year over year CPI is expected to be +2.1% flat from last month’s figure. Later today, we will receive the minutes from last month’s surprisingly dovish FOMC meeting and all eyes will be on the release searching for the reasons for the Fed’s aggressive move. Also today, the European Central Bank will meet to discuss policy and many investors are hopeful that the bank will make some stimulative policy announcements. The ECB announcement could prove to be a market mover ahead of the Fed minutes. Also today the Treasury will auction off $24 billion 10 year notes, bank CEO’s will testify in congress, and former Fed Chair Janet Yellen will speak. The great ride-share debate will pick up again as Uber is expected to publicly file for its IPO providing lots of detail about the now-private unicorn.