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Global Economy & Markets, Weekly Roundup 17/04/18

17/04/2018 - Reports

Global Economy and Markets

As trade and geopolitical concerns continue, the US Q1:2018 earnings season will be a key driver for equity market

Key Takeaways

So far in Q2:18, global equities are up (MSCI World: +0.9% | -0.5% ytd), following the first negative quarter in two years in Q1:18. Corporate earnings announcements for Q1:18 and earnings guidance for future quarters provided by companies, will be a key for equity performance going forward.

Fulfilling expectations, the S&P 500 Q1:18 earnings season commenced on a positive note (see page 3), with analyst expectations for EPS growth of +17.2% yoy in Q1:18 and of +18.3% yoy for FY:2018. Citigroup, JP Morgan, Wells Fargo and Bank of America beat consensus estimates by 2% - 6%, (nevertheless their equity prices fell by 2% - 3%).

Strong company results are expected worldwide overall in 2018 (MSCI World EPS growth: +14% yoy), albeit large gaps remain between regions (e.g. euro area 2018 EPS: +7.3% yoy | UK: +8.2% yoy). 

The Q1 earnings season begins with equity valuations still high, albeit down slightly compared with early 2018. Indeed, the US equities 12-month forward P/E ratio of 16.4x ranks in the 76th percentile since 2003 (versus 18.6x and 100th percentile at the start of 2018). At the same time, the euro area 12-month forward P/E ratio of 14.5x ranks in the 83rd percentile since 2003 (15.5x and 96th percentile at the start of 2018).

Equity volatility remains high (thus trimming risk-adjusted returns), in part due to geopolitical issues (Syria conflict) and trade issues (mainly between the US and China). Both 1-month (7.5%) and 3-month (11.8%) realized volatility in US equities rank in the 92nd percentile since 2003.

On the other hand, interest rate and FX (implied) volatility has receded recently, to the 3rd and 9th percentile, respectively, since 2003. The US Treasury 10Yr yield has risen by 9 bps month-to-date, to 2.83%, slightly lower than its 2.90% peak in mid-March. In the FX spectrum, the Russian Ruble suffered during the past week (-6.7% wow in NEER terms) due to diplomatic tensions and the Syrian conflict. The latter also resulted in a sharp rise in oil prices (Brent: +9.1% wow to $72.9/barrel, the highest since November 2014).

Regarding trade, investors appear to have entered a “wait-and-see” mode, in anticipation of how and, to what extent, protectionist threats will materialize, mainly between the US and China. Recall that the public consultation period for the prospective US tariffs on Chinese imports is due to continue until May 22nd.

China’s announcements on the opening up of its financial markets contributed to a more conciliatory tone with the US. China will, inter alia, eliminate by end-June, foreign ownership limitation for Chinese banks (currently: 25%), as well as for financial asset management companies (currently: 49%) and will allow foreign banks to establish both branches and subsidies in the country. Investors will now focus on the Q1:18 Chinese GDP announcement (consensus for GDP: +6.8% yoy, stable compared with Q4:17).

Regarding central banks, the minutes of the March Fed meeting (issued on April 11th) echoed the message from the original statement and FOMC members’ economic projections of an improved economic outlook and increased confidence for inflation prospects.