The Daily Prophet: Earnings Season Can't Come Soon Enough

Connecting the dots in global markets.

Stocks recouped about half their big losses from Monday. Hardly anyone is feeling optimistic about such a paltry rebound, but they probably should. Equities are in one of those limbo-like zones that happen just before the start of every earnings season when companies go quiet before releasing results. The radio silence from corporate executives means investors are flying blind, trading off whatever news of the day dominates the headlines. Rather than sales, orders and profit margins, things such as politics and the economic data can take on more relevance.

That has contributed to the recent roller coaster-like ride in stocks, where swings of 2 percent or more in the S&P 500 Index and other benchmarks have seemingly become common. But investors who are able to look beyond the gyrations will find a stock market that is getting cheaper by the day. At 16 times estimated earnings, the S&P 500 is trading at its lowest valuation any time since the U.K. voted to leave the European Union in June 2016, falling from about 18.25 times in late January. Earnings season begins next week as the big U.S. banks report results, and first-quarter profits overall are forecast to have risen 17 percent from a year earlier, according to Richardson GMP.

The wealth management firm also notes that first-quarter earnings estimates have increased by 5.4 percent since the start of the year, which is significant because forecasts typically decline over the course of a quarter. "Gone is the argument that valuations are stretched," the strategists at Richardson GMP wrote in a Tuesday research note. "Despite the recent spate of market volatility, the fundamental underpinnings of the stock market remain intact."

The market for junk bonds, or those rated below investment grade, is looking a bit schizophrenic. On the one hand, a measure of credit risk for U.S. high-yield bonds reached the highest levels since December 2016, as jittery investors cut risk amid a stock market plunge, according to Bloomberg News' Claire Boston. The cost to protect a basket of junk bonds against default rose as much as 12.7 basis points to more than 373 basis points on Monday afternoon in New York, according to data provider CMA. On the other hand, exchange-traded fund flows show investors poured money into junk-bond funds, according to Bloomberg News' Rachel Evans and Carolina Wilson. The iShares iBoxx $ High Yield Corporate Bond ETF took in $330 million, even though it closed near its lowest level since 2016. So, what gives? To Josh Lukeman, head of ETF market making for the Americas at Credit Suisse, there are logical explanations, and it doesn't mean investors have changed their tune on one of the worst performing parts of the bond market this year. Rather, the inflows could signal that some investors sense a bargain while others may be looking to cover their bets against the asset class, Lukeman told Bloomberg News. Also, there could be banks acquiring shares in the ETF to lend them out to a third party to short.

Canada's dollar strengthened more than any of its major peers on Tuesday, with a Bloomberg Correlated-Weighted Index tracking the currency rising as much as 1 percent. That's also its biggest gain since Dec. 1. Traders are encouraged by a Bloomberg News report that the Trump administration is pushing for a preliminary Nafta deal to announce at a summit in Peru next week, and will host cabinet ministers in Washington to try to achieve a breakthrough. For traders, almost any type of resolution to the trade spat would eliminate a cloud hanging over not only Canada's currency, but also its stocks and bonds. The Bloomberg Correlation-Weighted Index for Canada's dollar has risen 2.77 since falling to a two-year low on March 19. Besides the uncertainty over Nafta, the so-called loonie has been under pressure due to soft economic data. Last week, the government said gross domestic product shrank in January, contracting 0.1 percent during the month. The economy was weighed down by declines in oil production and real estate. After leading the Group of Seven in economic growth in 2017, Canada is widely expected to slow this year as highly indebted households pare spending, according to Bloomberg News' Theophilos Argitis.

The fringes of the global stock markets, long derided for their volatility, are quickly gaining respect. Equities in so-called frontier nations not only produced better absolute returns than developed and emerging markets last quarter, they also did so on volatility-adjusted terms, according to Bloomberg News' Srinivasan Sivabalan. The group that includes countries such as Argentina, Vietnam and Kuwait has rallied for seven successive quarters, with price swings half as wild as in more mature markets. With a combined market capitalization of just $715 billion, frontier markets don’t get the kind of attention enjoyed by their bigger cousin, the $20 trillion group of emerging nations. Still, money managers such as Aviva Global Investors have increasingly added frontier stocks to their portfolios, using their performance as a counterweight to global stock volatility. Frontier stocks posted the highest first-quarter return in four years relative to emerging peers. Their relative volatility also fell to the lowest level in 14 months, signaling that they survived the wobble in global markets better than other equity groups.

Gold is the only precious metal to show a gain this year, and a veteran trader who's been trading the commodity for four decades says the path is set for prices to rise to their highest level since 2013. Bullion could top $1,400 an ounce in 2018 as escalating trade tensions drive investors to havens and the three-decade bull market in bonds nears an end, Rick Rule, the chief executive officer of Sprott U.S. Holdings, told Bloomberg News' Ranjeetha Pakiam. Spot gold traded at $1,337.50 Tuesday. “In the 40 years I’ve been involved in the gold market, the most important determinant of the gold price has been international confidence in the U.S. dollar and, in particular, the U.S. dollar as expressed by the U.S. 10-year Treasury,” Rule said. “The fact that the U.S. seems to be bound to engage in a zero-sum trade war has begun to strike people as something that’s bad for everybody in the world, not just the U.S. The potential for a winnerless trade war certainly gives cause to some concern.” Aggregate federal, state and local U.S. debt, both on balance sheet and entitlements, relative to levels of savings and investments, will contribute to worries over the longer-term purchasing power of the dollar, particularly in view of low current yields, Rule said.

For economists, Wednesday will be like Christmas, Hanukkah and Kwanza all rolled up into one. That's another way of saying that the amount of data due to be released will be overwhelming. In the U.S. alone, economists will get the ADP employment, Markit composite, ISM non-manufacturing, factory orders and durable goods reports. In Europe, reports on euro area inflation and employment will be released. And in Asia, economists will get a look at manufacturing data in Japan and China. The data will help inform the debate over whether the synchronized global economic growth narrative is losing steam. Citigroup's economic surprise indexes, which measure the data that exceed estimates against the data that fall below estimates, have dropped to their lowest level since August.

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