Take Five: A week in central banking
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[January 18, 2020] (Reuters)
- 1/THE ORACLES SPEAK
Geopolitics overshadowed monetary policy
for the first time in many months in early January. But such
distractions tend to be short-lived nowadays, with investors getting
back to central bank-watching swiftly.
Rate-setters in many countries are about to hold their first policy
meetings of 2020 - in Japan on Monday and Tuesday, Canada on Wednesday,
Norway and the euro zone on Thursday. On Friday, China sets loan prime
rates. In emerging markets, Indonesia and Malaysia bear watching on
Wednesday - will they follow Turkey and South Africa by easing policy?
Japan, Canada, Norway and the European Central Bank (ECB) are not
expected to make any changes, while it is unlikely China will act again
so soon after its early-January reserve ratio cut for banks. The ECB,
however, will launch its first strategy review since 2003 to rethink an
inflation goal that has not been met for seven years.
Asset manager Pictet reckons at current prices, global stock markets
have already priced over $2 trillion in central bank stimulus this year.
But it predicts authorities will provide less than that, disappointing
investors. So what policymakers say or signal at the meetings could well
set the tone for equity markets, which have resumed scaling record
Now that U.S. President Donald Trump has dealt with China on trade for
now, it is probably a matter of time before his wrath falls on Europe.
On Tuesday, he gets a platform to express his views, speaking at the
Davos World Economic Forum.
While signing the Phase 1 deal with China, Trump already griped at
having to "pay for our money" in a swipe at the euro zone's negative
borrowing costs. He also blames the "too high" dollar for the huge U.S.
current account deficit. A currency war risk therefore may not be too
remote, especially in an election year. And remember, the Treasury
already lists Switzerland, Germany, Italy and Ireland as suspected
currency "manipulators" - all have trade surpluses with the United
Trump will not be short of sparring opportunities at Davos - some 53
heads of state are to show up in the Alpine resort, https://tmsnrt.rs/2HgY4lx
including Germany's Angela Merkel. There will be 35 finance and 30 trade
ministers. And given the green focus of this year's summit, 17-year-old
climate activist Greta Thunberg will attend. It is unclear if her paths
will cross those of Trump who is well known for his scepticism over
climate change and has advised Thunberg via Twitter to "chill, Greta,
3/PMI ON BOE RADAR
Friday brings "flash PMIs" in many countries - advance readings of
purchasing managers' business activity indexes. While the euro zone
figures will be scrutinised to get a measure of economic recovery,
British PMIs will grab more attention, given they comprise the last key
data release before the Bank of England's (BOE) Jan. 30 meeting.
A poor number, coming on top of a string of dismal data, could seal the
case for easing policy immediately. As recently as Jan. 10, markets saw
a 20% chance of a BOE move this month but on Jan. 13 that probability
leapt to 50% and is now above 60%. Falling gilt yields and sterling also
imply investors are bracing for a rate reduction.
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Traders work on the floor at the New York Stock Exchange (NYSE) in
New York, U.S., January 14, 2020. REUTERS/Brendan McDermid
Of course, those moves could be reversed if PMIs surprise to the upside. But a
modestly positive reading may still not deter the bank from cutting rates this
month. In any case, lower British interest rates are fully priced for May.
When Netflix, the first of the so-called FAANGs (Facebook, Amazon, Apple, Netlix
and Google), reports Q4 results on Tuesday, investors will want to see how the
streaming giant is coping with a wave of competition led by another
entertainment heavyweight Walt Disney Co.
Launched last April, Disney+ looks like the most dangerous challenge yet to
Netflix's dominance of an increasingly crowded video streaming market. Netflix
shares are down about 8% since then, hit by worries over slowing subscriber
growth and the costs of high-budget productions such as The Crown and The
Irishman. Disney+, on the other hand, has risen 24%.
Other competitors are on the horizon. Apple's new streaming service costs $5 per
month, less than half Netflix's monthly standard price. And AT&T will launch HBO
Max in 2020.
Investors expect the stock to be volatile. Netflix options imply a 7.6% swing
for the shares in either direction by next Friday, Jan. 24. Over the last eight
quarters, on average, the shares moved 6% after the company reported results,
according to Trade Alert.
5/EUROPE INC TURNING PAGE
European equities have endured a nine-month long profits recession but relief
may be coming - I/B/E/S Refinitiv estimates show STOXX 600 companies in line for
2.5% earnings growth in the fourth 2019 quarter.
That is the good news. The bad news is markets are already at record highs, and
that is after a 24% rally last year. Probably central banks' stimulus helped,
alongside better Brexit and global trade headlines towards end-2019. But it does
imply there is little fuel in the tank for further market gains. Currently,
forecasts are for 2.5% profit growth in Q4 but that is already more than halved
from two months ago.
For 2020 as a whole, 8.8% growth is expected but again, subject to revisions.
And while valuations are less exalted than U.S. peers, at 15 times forward
earnings, they are hardly cheap.
Sluggish economies mean challenging times for retailers, autos and banks. But
turnaround expectations will be tested in coming days when lenders UBS, ING and
Bankinter report, while semiconductor makers ASML and STMicro could show if the
tech sector is starting to recover.
(Reporting by the New York markets team; Sujata Rao, Dhara Ranasinghe and Joice
Alves in London; Editing by Andrew Cawthorne)
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