The Daily Prophet: JPMorgan Turns the Earnings-Season Hype Up to 11

Connecting the dots in global markets.

In the classic 1984 rock mockumentary "This is Spinal Tap," lead guitarist Nigel Tufnel proudly explains that his riffs are louder than anyone else's because the volume dial on his amplifier goes from zero to 11, instead of the usual zero to 10. The phrase has since become synonymous with something that is taken to impossible extremes. JPMorgan has just taken the hype over first-quarter earnings to 11. 

The anticipation of strong earnings growth may have been the only thing keeping equities from diving more than they have given all the political and geopolitical crosscurrents buffeting markets at the moment. Indeed, the S&P 500 Index rose Thursday to its highest since March 21. Earnings for members of the S&P 500 are forecast to have risen 16.5 percent in the first quarter from a year earlier, the most since mid-2011. As if that wasn't reason enough to be bullish, the strategists at JPMorgan wrote in a research note that they expect earnings to exceed consensus estimates by 4 percent to 5 percent. That's even after forecasts were raised 6 percent following the passage of tax cuts, according to Bloomberg News' Joanna Ossinger.

“Company guidance and Street estimates are likely too low with respect to actual tax benefits, weaker U.S. dollar and higher oil,” JPMorgan strategists including Dubravko Lakos-Bujas and Marko Kolanovic wrote in a note Thursday. Give such risks as the brewing trade tiff between the U.S. and China, rising tensions between the U.S. and Russia over Syria and the seeming unpredictability of U.S. policy, anything less than perfection in earnings could be a negative for equities. 

Dan Ivascyn, who runs the world’s largest actively managed bond fund at Pacific Investment Management Co., says this is a good time to take some risk off the table given fresh geopolitical tensions and rising interest rates. Perhaps, but the market for high-yield corporate bonds is rebounding from losses in February and March like there's nothing to worry about. Maybe traders of junk bonds are just as excited about the prospects for strong corporate earnings as stocks traders are, but whatever the reason the Bloomberg Barclays U.S. Corporate High Yield Index has surged 0.76 percent this month through Wednesday to its highest since Feb. 5. Those gains are the most among the 19 major Bloomberg Barclays bond indexes. The extra yield investors demand to own junk bonds instead of Treasuries has dropped to 3.40 percentage points on average from 3.61 percentage points on April 2. Guggenheim Partners warns against getting too comfortable. The firm issued a report Thursday saying that although the current low-default environment supports near-term values, the benign credit backdrop will not last indefinitely. "As the Federal Reserve tightens monetary policy further, we expect to see higher default rates in 2019 and 2020," they wrote. "When short-term rates get to around 3 percent, funding costs will pressure corporate borrowers’ ability to pay debt service on existing liabilities."

To describe the aluminum market as hot right now would be the biggest understatement in three decades. Seriously. Aluminum prices are heading for the best week in at least 30 years as U.S. sanctions on Russian producer United Co. Rusal send buyers scrambling to find supplies, according to Bloomberg News' Luzi Ann Javier. On Thursday, prices of the metal climbed to the highest since 2012, which helped push this week’s gain to almost 14 percent, the most in Bloomberg records going back to June 1987. On Thursday, Rusal was said to declare force majeure on some shipments of alumina, used to make aluminum. That comes a day after Glencore, the biggest buyer of metal from Rusal, was said to have invoked the same legal clause on aluminum. The moves compound supply worries after the LME and CME Group’s Comex said they won’t allow new deliveries of metal from Russian billionaire Oleg Deripaska’s Rusal, the biggest aluminum producer outside China. “People are rushing to secure supply,” Ryan McKay, a commodity strategist at TD Securities in Toronto, told Bloomberg News. “People are expecting that a significant amount of the metal produced by Rusal is going to be off the market.”

One of the more interesting sideshows in the U.S.-China trade tiff has been the performance of the Hong Kong dollar, which is pegged to the U.S. dollar. The Hong Kong Monetary Authority allows the currency to trade in a range of HK$7.75-7.85 against the greenback. But this year, there's been a pronounced weakening in the Hong Kong dollar, and it depreciated to HK$7.85 on Thursday, prompting the HKMA to step in and buy HK$816 million ($104 million) to support the currency. It was the first time the de facto central bank had to intervene since the current trading band was imposed in 2005, according to Bloomberg News. The primary reason for the weakness has been an abundance of liquidity in Hong Kong's markets, which has kept local interest rates from catching up with higher U.S. levels. For now, officials say the weakness in the currency doesn't look to be the work of speculators testing the resolve of the HKMA to defend the trading band. The HKMA’s purchases have the potential to boost borrowing costs by draining liquidity. That would signal the end of an era of ultra-cheap money that made Hong Kong the world’s least affordable market for housing and propelled equities to all-time highs.

The news that Lucara Diamond has recovered a massive 472-carat light brown diamond at Karowe mine, the third-largest find at the Botswana site, underscores the epic slump the market for the precious gem has been in for the past seven years. Although the weekly Rapaport Diamond Trade Index has risen to $6,753 from $6,561 late last year, that's still down more than from the peak of $12,043 in July 2011. The index is formulated from the average asking price for the top 25 best quality 1 carat diamonds, color between D and H and clarity between internally flawless and very small inclusion. The Botswana mine has been a windfall for Vancouver-based Lucara, which has gained a global reputation for producing some of the biggest and best diamonds, according to Bloomberg News' Danielle Bochove. The largest stone uncovered at the site, the 1,109-carat Lesedi La Rona, was sold last year for $53 million, or $47,777 a carat. Top diamond miner De Beers said earlier this year that the strong global economy, the weaker dollar and U.S. tax cuts could be positive for demand.

China is expected to release its trade data for March in a few hours, and the headlines should appease -- at least temporarily -- U.S. President Donald Trump. China's Customs Bureau will likely say that export growth slowed to 11.8 percent in the month from a year earlier, down from February's heady 44.5 percent pace, according to the median estimate of economists surveyed by Bloomberg. Imports probably accelerated to 12 percent from 6.3 percent. The risk for investors is that the numbers come in lower than the estimates, given the recent softness in manufacturing data in China and some of its main trade partners. For the year, the economists at Bloomberg Intelligence are forecasting something closer to mid-single-digit growth in exports, in line with the expansion in global demand.

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