1. Central bank meetings
Central bankers in the Euro Zone, Japan and Canada are not expected to make any changes in their first policy meetings of the year this week. However, the European Central Bank is launching the first review of its policy framework since 2003 amid questions over whether to adjust its inflation target which has not been reached 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 expects that central banks will provide less than that, disappointing investors. What policymakers indicate this week could well set the tone for equity markets, which have resumed scaling record highs.
In the U.S., the Federal Reserve is in blackout mode ahead of its first rate-setting meeting of 2020.
2. Trump at Davos
Now that Trump has reached an interim agreement with China on trade it is likely just a matter of time before he turns his wrath on Europe. On Tuesday, he will get the opportunity to air his views on the U.S. economy and trade, speaking at the Davos World Economic Forum.
The U.S. president has already griped at having to "pay for our money" in a swipe at the Euro Zone's negative interest rates. He also blames the "too high" dollar for the huge U.S. current account deficit. The prospect of a currency war may not be too far-fetched, especially in an election year. The U.S. Treasury already lists Switzerland, Germany, Italy and Ireland as suspected currency "manipulators" - all have trade surpluses with the United States.
3. Netflix earnings
Netflix (NASDAQ:NFLX) is to report its fourth quarter earnings results after the close of trade on Tuesday, the first of the FAANG stocks to do so. Investors will be tuning in to see how the streaming giant is coping with a wave of competition led by another entertainment heavyweight Walt Disney (NYSE:DIS).
Investing.com analysts are expecting the streaming media company to have earned 52 cents per share in the fourth quarter, an increase on the 30 cents per share it earned in the same quarter last year, according to FactSet.
Since its launch 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%.
4. Economic data
In a quiet week on the economic calendar, Friday brings flash PMIs for the Euro Zone, the U.K. and the U.S. While the euro zone figures will be scrutinized for further signs of the economic recovery, the U.K. PMIs coming on the back of Tuesday’s employment report will grab more attention, being the last major data release before the Bank of England's Jan. 30 meeting.
Poor figures, coming on the heels of a recent string of weak data could cement expectations for easing policy as soon as this month, but those expectations could be pared back if PMIs surprise to the upside. But a modestly positive reading may still not deter the bank from cutting rates immediately.
5. IMF to update global economic forecasts
The IMF is to release its adjusted global economic forecast on Monday in Davos. On Friday IMF Managing Director Kristalina Georgieva said the interim trade deal between Washington and Beijing will reduce - but not eliminate - uncertainty that has acted as a drag on global growth.
The organization had previously estimated that global trade tensions would shave 0.8% off international economic growth.
Georgieva also said the IMF generally favored multilateral agreements and warned that bilateral agreements could have negative implications for global growth in the longer term.
1. China's growth hits 30-year low but yuan strengthens
China’s economy grew at the slowest pace in 30 years, according to data released overnight. Gross domestic product rose 6.1%, down from 6.2% in 2018, while the annualized rate of growth fell to 6.0% in the fourth quarter.
However, because the development had been long expected, markets zeroed in on a more upbeat set of monthly numbers for December, which all outstripped expectations. Industrial production rose 6.9% on the year, its fastest rate since April, while retail sales growth stayed steady at 8.0%. Growth in fixed asset investment also ticked up from a multi-year low to 5.4%.
While the numbers don’t point to a sharp recovery in the Chinese economy this year, they do appear to add weight to arguments that the worst of the effects of the trade war with the U.S. is over.
The yuan hit another five-month high on the back of the numbers.
2. Stock set to open higher as Europe hits new records
The Chinese data are set to push U.S. stocks to new record highs again on Friday, having already done as much for European stock markets.
By 6:15 AM ET (1115 GMT), Dow futures were up 80 points, or 0.3%, while S&P 500 futures were up 0.2% and Nasdaq 100 futures were up 0.4%.
Earlier, the Euro Stoxx 600 hit a new record high, while the French CAC 40 hit a 12-year high.
After the rush of bank earnings from Wall Street so far this week, earnings season is taking a breather. Meanwhile, Alphabet (NASDAQ:GOOGL) became the fourth U.S. company in history to notch a market value of $1 trillion.
3. U.S. data deluge due
There’s plenty more U.S. economic data due to follow Thursday’s robust readings for retail sales, which nipped in the bud any concerns prompted by Target’s disappointing holiday sales update.
At 8:30 AM ET (1330 GMT), December’s housing starts and building permits data will have the chance to corroborate the NAHB’s survey that showed confidence still close to multi-year highs at the turn of the year.
However, the most important number out later is probably industrial production, due at 9:15 AM along with manufacturing production and capacity utilization rates for December. The JOLTS job opening survey follows and the University of Michigan Consumer Sentiment survey round off the excitement at 10 AM. There’ll also be speeches from Philly Fed President Patrick Harker at 9 AM and banking supervision head Randal Quarles at 12:45 PM.
4. U.K. retail sales strengthen rate cut arguments
The arguments for an interest rate cut in the U.K. gained weight after dismal retail sales figures for December.
Overall sales fell 0.6%, disappointing forecasts for a 0.5% rise. They’ve now fallen for the last five months in a row and for seven out of the last nine months. November’s figure was also revised down.
Money markets are now pricing in a 75% chance of a 25 basis point cut by the Bank of England when its Monetary Policy Council meets at the end of the month. The pound fell.
By contrast, the pressure on the European Central Bank to provide further stimulus eased slightly after figures showed headline eurozone inflation steady, and underlying inflation creeping marginally higher.
5. Treasury to issue 20-year debt
The U.S. Treasury intends to issue 20-year bonds for the first time in 33 years, according to a statement on its issuance plans for the first half of the year.
The new maturity will arguably take some liquidity away from the 10- and 30-year sales, but should not otherwise disrupt the market.
The Treasury said it expects strong demand for a product it last issued in 1986. It will need it, given that the federal budget deficit is running at over $1 trillion a year, its highest in seven years, despite a decade-long economic expansion.
1. U.S. data dump to refocus minds on the economy
With the China-U.S. trade deal finally signed, it’s time to switch focus back to the state of the economy, and there’s a heavy data dump coming at 8:30 AM ET.
Most important will likely be the release of December’s retail sales report, especially in the light of Target's (NYSE:TGT) disappointing sales update on Wednesday. Analysts polled by Investing.com expect a monthly increase of 0.3%
There’s also the Philadelphia Fed’s regional business survey and weekly jobless claims to look forward to.
Then at 10 AM, the NAHB housing market index for January will be published (a slight drop from 76 to 74 is expected), while the Federal Reserve’s Michelle Bowman is also due to speak at the same time.
2. Emerging FX in focus as Russia reshuffles and Turkey cuts
Central banks in two of the world’s most important emerging markets are expected to show that the scope for further interest rate cuts may be narrowing, after a year in which the world’s central banks almost without exception swung to a looser monetary policy stance.
Turkey’s central bank cut its one-week repo rate by another 75 basis points, more than expected, to 11.25%. That's now below the rate of inflation. The lira was stable.
The South African Reserve Bank is due to announce its rate decision at 8 AM, and is expected to keep its key rate at 6.50% for the third meeting in a row, against a backdrop of sustained concerns about the country’s budget and the cost of bailing out power company Eskom.
Meanwhile in Russia, the ruble weakened to its lowest in a week as the market absorbed the implications of the appointment of the country’s head tax collector as Prime Minister. Dmitry Medvedev and his cabined resigned en masse on Tuesday after President Vladimir Putin raised the prospect of a constitutional reform that analysts said was aimed to keep him in power when his current term as President ends in 2024.
3. Stocks set to hit new highs
U.S. stock markets are set to open higher after futures on the main indices hit fresh record highs overnight, even though the signing of the phase one deal with China added little in the way of news to what was already known.
By 6:15 AM ET (1115 GMT), Dow futures were up 61 points or 0.2%, while S&P 500 futures were up 0.3% and the Nasdaq 100 contract was outperforming slightly, up 0.4%, helped by a strong earnings report overnight from Taiwan Semiconductor.
The day’s earnings roster is headed by Morgan Stanley(NYSE:MS), while CSX and Kinder Morgan will give insights into the state of the real economy later.
4. Alcoa's shares tumble after Q4 loss
Alcoa – once considered a bellwether for the U.S. economy – said it lost money in the fourth quarter after a 27% drop in sales, evidence of the ravages of the trade war with China.
The company, which makes products for the auto, drinks and aerospace industries among many others, said it expects global demand for aluminium to recover by between 1.4% and 2.4% this year, after falling last year under the influence of the trade war.
Its stock fell 3.4% in after-hours trading.
5. Germany hastens coal exit
Germany announced a breakthrough in its plans to end the use of coal in electricity generation by 2035, some three years earlier than expected.
Merkel agreed a 40 billion-euro aid package with regions likely to be most affected by the restructuring and is reportedly also set to agree 2.6 billion in compensation for RWE (DE:RWEG), the country’s largest generator.
The move reflects the increased pressure on Chancellor Angela Merkel on climate policy. The failure to end coal dependence has jeopardized Germany’s chance of meeting its commitments under the Paris Accord, weakening both its and Europe’s authority in leading the global debate on Climate Change. The news will give the EU a freer hand in moving forward with plans for a “carbon border tax” – a sort of import tariff on manufacturers from more polluting economies, such as China.
1. U.S., China to sign trade deal
The U.S. and China will finally sign their ‘phase-1’ trade deal in a ceremony in Washington scheduled for 11:30 AM ET (1630 GMT).
While the full text of the deal still hasn’t been released, reports suggest that China will commit to buy at least $200 billion U.S. goods and services over the next two years in return for the cancellation of U.S. import tariffs that had been scheduled for December and a partial rollback of other tariffs. This will still leave most of the U.S. measures taken since 2018 in place.
Late on Tuesday, Treasury Secretary Steven Mnuchin had told Reuters that there will be no further tariff cuts without further concessions from China, reminding markets that the underlying rivalry between the two countries – and specific concerns about Chinese IP theft and subsidies – are unlikely to disappear.
2. German growth hits six-year low
Germany recorded its slowest growth in six years in 2019, according to a preliminary estimate from the country’s statistics office. Destatis said gross domestic product growth slowed to only 0.6% from 1.5% in 2018.
That was largely as expected, but confirms the damage done to the export-sensitive economy by the U.S.-China trade war and by Brexit, which has hobbled Germany’s largest export market in Europe, the U.K.
The government said the industrial sector hadn’t yet overcome its “period of weakness” but pointed to signs of stabilization in manufacturing orders and output at the end of last year, and to sustained strength in construction. Another point to emerge from Destatis’ briefing was that Germany posted a budget surplus of 49.8 billion euros ($55.5 billion), or 1.9% of GDP.
3. Muted opening for stocks; Goldman, BoA results due
U.S. stock markets are set to open modestly lower in the wake of Mnuchin’s comments on Tuesday, which reminded participants of the limitations of the truce that’s due to be signed later.
By 6 AM ET (1100 GMT), Dow futures were down 13 points, less than 0.1%. S&P 500 Futures and the Nasdaq 100 contract were down by a similar amount.
Reports from Goldman Sachs, Bank of America, PNC Financial and U.S. Bancorp – all due before the opening -- should show whether the rock-solid performance of JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) in the fourth quarter extended to the whole sector.
UnitedHealth was the first major stock to report Wednesday, narrowly beating expectations for earnings per share on revenue roughly in line with forecast.
4. Weak CPI cements U.K. rate cut expectations
Money markets now view a 25-basis point interest rate cut by the Bank of England as a nailed-on certainty, after U.K. consumer inflation fell to a three-year low of 1.3% in December under the weight of electoral and Brexit-related uncertainty.
Michael Saunders, a Bank of England policymaker who has been pushing for a cut for two months already, said in a speech that the economy faces an extended period of subdued growth, creating a disinflationary and persistent output gap. He said the country needs a “relatively prompt and aggressive response.”
The pound bounced back above $1.30 against the dollar in the wake of the news.
5. Oil drifts near 6-week lows after stockpile increase
Crude oil prices stayed stuck near six-week lows in the wake of a surprise increase in U.S. inventories last week. The American Petroleum Industry reported that U.S. crude stocks rose by 1.1 million barrels last week, rather than the 750,000-barrel draw predicted for the official government data that will be released at 10:30 AM ET (1530 GMT).
The contango (discount) in U.S. crude futures – normally a sign of short-term oversupply – continued for a second day. Brent traded down 0.2% at $64.39 a barrel.
In addition to the inventories news, market participants have also become more cautious about Chinese demand in the wake of Mnuchin’s comments on Tuesday.
1. Banks kick off earnings season.
The U.S. earnings season kicks off with a bang as JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) all report their results for the fourth quarter of 2019.
Of these, JPMorgan (NYSE:JPM), the biggest and – in recent years – the most dynamic of Wall Street’s blue bloods, will be most closely watched, especially as its U.S. operations shed a light on the health of the broader economy.
Consensus estimates are for a 19% rise in earnings per share to $2.35, while revenue is expected to rise 4.3% to $27.96 billion. FactSet expects the bank’s net interest margin to be stable at 2.37%.
Citigroup’s EPS are expected to have risen 13% to $1.82, on a 4.5% increase in revenue to $17.89 billion.
Wells Fargo’s earnings are expected to have fallen to $1.12 a share from $1.21 a year ago.
2. Blackrock shakes up portfolio to address climate challenge
Blackrock (NYSE:BLK), the world’s biggest portfolio investor, warned of a profound shift in the allocation of capital as investors wise up to the risks of climate change.
The company, which has been criticised for not using its market power to focus company boards more on sustainability issues, said in its annual letter to CEOs that it will double its offering of sustainability-focused ETFs to 150. It will also cut companies that derive a quarter or more of their revenues from thermal coal from its actively managed portfolios, aiming to raise its sustainable assets to $1 trillion over the next 10 years from $90 billion today.
“Companies, investors, and governments must prepare for a significant reallocation of capital,” CEO Larry Fink said in the letter.
3. China’s trade rebounds
China’s foreign trade rebounded well above expectations in December as companies rushed to beat the deadline for higher U.S. import tariffs. Exports came in 7.6% up on the year, while imports rose by an even more impressive 16.3%.
The rush to beat the tariff deadline suggests that exports could fall back sharply in January and February, when further distortions can be expected from the Chinese New Year celebrations. Even so, the figures point to further evidence of Chinese industrial activity bottoming out after successive U.S. tariff hikes.
The news comes a day ahead of the scheduled signing of the U.S.-China trade truce, which cancelled the December tariff increase and rolled back some others, while still leaving most existing import tariffs in place.
4. Stocks set to open slightly lower
U.S. stock markets are set to open a touch lower after hitting new record highs again on Monday in anticipation of the U.S.-China trade deal.
By 6:15 AM ET (1115 GMT), Dow futures were down 61 points or 0.2%, while S&P 500 futures and the Nasdaq 100 contract were both down 0.3%.
Stocks in Europe had earlier opened lower before largely erasing losses.
Various high-profile houses have warned that the markets may be getting ahead of themselves, given the late stage of the economic cycle and the narrowing scope for support from central banks. UBS Wealth Management, the world’s biggest wealth manager, added its voice to a growing chorus of caution on Tuesday, chief investment officer Mark Haefele telling a conference that “As central banks flood the markets with liquidity, that pulls forward a lot of your returns. That’s simply the way it is.”
On a day set to be dominated by corporate earnings, there’s only one data release of note – the U.S. CPI for December at 8:30 AM ET.
5. Visa pushes expansion beyond cards
Visa (NYSE:V) said it would buy fintech startup Plaid Inc. for $5.3 billion, as part of its strategy of diversifying beyond its core card business and gain more exposure to consumers’ use of fintech apps.
Plaid offers software that gives financial technology apps access to customers’ bank accounts. Venmo the money-transfer service owned by PayPal, is one of Plaid’s biggest customers, according to the Wall Street Journal.
The acquisition reflects the need for Visa and Mastercard (NYSE:MA), two of the best-performing financial stocks of the last decade, to stay relevant as technology threatens to leapfrog the now-dominant card payment business.
1. Oil Hits 1-Month Low as Iran Seethes
Protests against the Iranian regime spread across the country for a second day on Sunday, indicating that the bout of instability triggered by the U.S.’s assassination of Revolutionary Guards commander Qassem Soleimani may not yet have run its course.
President Donald Trump issued a tweet in support of the protesters in Farsi over the weekend, adding : “DO NOT KILL YOUR PROTESTERS” in a separate tweet in English aimed at the regime.
Crude oil prices suggest, however, that any tension over a confrontation has well and truly passed. By 6:15 AM ET (11:15 GMT) U.S. crude futures were flat at $59.04 a barrel, having hit a one-month low of $58.71 a barrel overnight. Brent crude was down 0.1% at $64.94 a barrel.
2. Stocks set for higher opening
U.S. stock markets are set to open clearly higher amid a fading of global concerns about conflict between the U.S. and Iran ebb, and anticipation of the U.S.-China trade deal being signed on Wednesday.
By 6 AM ET (1100 GMT), Dow futures were up 127 points or 0.4%, while the S&P 500 futures contract was also up 0.4% and the Nasdaq 100 futures was up a touch more, by 0.5%.
With little on the earnings or data calendar Monday, the market is left to ruminate on a weaker-than-expected jobs report on Friday, or to look forward to the start of earnings season with results from JPMorgan (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) on Tuesday.
3. Emerging currencies march higher, led by China
The Chinese currency hit its highest level in over five months against the dollar, as optimism over the economic outlook strengthens ahead of the expected signing of a phase-1 trade deal between the U.S. and China on Wednesday.
The official yuan rate rose as high as 6.8883 to the dollar, its highest since the end of July, when President Donald Trump abruptly escalated the trade war with threats of new import tariffs.
The trade détente has also boosted other emerging market currencies to notable highs. The Russian ruble hit its highest in 20 months against the dollar. The Indonesian rupiah, the Turkish lira and Indian rupee have all risen by between 1.4% and 2.0% against the greenback in the last week as the trade and geopolitical outlooks have improved.
4. U.K. GDP shrunk in November, boosting rate cut hopes
The U.K. economy unexpectedly shrunk in November ahead of the country's general election, strengthening expectations of an interest rate cut from the Bank of England and pushing the pound down below $1.30 for the first time this year.
Gross domestic product fell 0.3% in November, missing forecasts for a flat reading. Industrial production and manufacturing output also weakened. The data mean that growth of 0.1% to 0.2% will be needed in December to stop the economy shrinking in the fourth quarter overall.
Over the weekend, another of the BoE’s rate-setters, Gertjan Vlieghe, had said that the case for an interest rate cut now was building. Vlieghe’s comments followed similarly dovish remarks from BoE Governor Mark Carney and monetary policy committee member Silvana Tenreyro last week.
5. Ford flops in China; Porsche roars
Ford Motor (NYSE:F) reported another dire set of sales in China, the world’s largest auto market, and said that the outlook for 2020 is even worse. Ford’s sales in China fell 26% last year, less than half of what it sold there in 2016, its peak year for sales. It said it expected the local market to keep shrinking this year.
Elsewhere, the Financial Times reported that Nissan (OTC:NSANY) is stepping up contingency plans for a divorce from France’s Renault (PA:RENA), its long-term alliance partner. The news pushed Renault shares down over 2% in Paris.
There was better news from Germany’s Porsche, part of the Volkswagen (DE:VOWG_p) group. It said global sales rose 10% to 281,000, due largely to demand for its Cayenne and Macan SUVs. It also said its all-electric Taycan, introduced halfway through last year, should also boost sales momentum this year.
1. It’s all about the jobs
The market tone is positive, but if there’s one economic indicator which has the ability to upset the apple cart it is the December jobs report, due at 8:30 AM ET (13:30 GMT).
This economic release has always been watched carefully by the market given the Federal Reserve’s dual mandate to consider both inflation and employment growth. And economists expect December’s employment report to show a solid pace of job growth and steady wage gains.
Nonfarm payrolls are expected to have risen by 164,000, according to economists’ forecasts compiled by Investing.com.
The unemployment rate is seen remaining at 3.5%, while average hourly earnings, an indicator of wage inflation, are forecast to have risen 0.3% for the month.
That said, there have been a number of strong economic signals leading into this release, including a pick-up in the U.S. service sector, falling joblessness claims and solid private hiring. Could November’s bumper 266,000 payroll additions be matched?
2. Boeing still under pressure
Shares in the aircraft manufacturer were hit hard following the crash of the Ukraine International Airlines Boeing 737 airliner on Wednesday which killed all 176 people aboard. The incident was initially put down to engine failure. However, there was a bounce when this version of events started to be questioned, with varying sources now suggesting a rogue missile attack as a possibility.
This could let the manufacturer off the hook for this incident, but Boeing (NYSE:BA) is still in hot water over the two crashes in 2018 and 2019 of its 737 Max planes which killed a combined 346 people.
Boeing sent more than 100 pages of internal emails Thursday to the House and Senate committees that have been investigating it in the wake of the two crashes. These haven't have painted the company in a positive light, with employees talking about fooling regulators and questioning the plane’s safety.
3. Looking at the oil rig count
Oil trading has been extremely volatile over the last week, as the tensions in the Middle East ramped up and then cooled. However, fundamental factors have also played their part, including the news from the Energy Information Administration that U.S. crude supplies edged up by a hefty 1.2 million barrels, instead of the expected drop of 3.6 million, for the week ended Jan. 3.
Later today there will be a look at what oil companies are planning amid high U.S. crude production and a build-up in inventories.
Baker Hughes releases its oil rig count at 1 PM ET (18:00 GMT).
The rig count came in at 670 last week and the trend has been down for the past year.
4. U.S.-China Trade Deal
One of the latest factors which has helped propel U.S. equities higher has been the expectation that China and the U.S. governments will finally end their trade spat, allowing the two economic powerhouses to trade relatively freely again.
This view has been helped by the news Chinese President Xi Jinping’s chief trade negotiator will travel to Washington early next week to sign a phase-one trade deal with the U.S.
U.S. President Donald Trump has indicated that the second part of the trade deal might not be ratified until after the 2020 election, but investors will be watching this space to see if any more news about this important deal emerges.
5. Equities keep pushing higher
All three of the senior equity indexes posted record closes on Wall Street overnight, and the U.S. equity futures point to more gains at the open today. At 05:50 ET (10:50 GMT), the S&P 500 Futures was up 7 points, or 0.2%, the Nasdaq 100 Futures up 33 points, or 0.4%, and Dow Jones 30 Futures up 61 points, or 0.2%.
There is event risk, with the official U.S. employment report due later for example, but there doesn't seem to be any stopping investors piling into equities.The Federal Reserve is taking an accommodative stance, Sino-U.S. relations appear to be thawing, employment growth has been strong to date, the Middle East appears to be settling down and analysts widely expect a solid recovery in profits for S&P 500 companies this year. What's not to like? A significant rotation into stocks from bonds may be on the way.
1. Trump’s diplomacy boosts stocks
The decision of President Trump to opt to impose new economic sanctions on Iran rather than call for military action prompted the risk-on tone in the markets.
There has been a strong tone in the equity markets throughout Asia overnight, Europe is higher and U.S. stock futures point to further gains. The S&P 500 Futures contract rose 11 points, or 0.34% by 5:20 AM ET (10:20 GMT), while the Nasdaq 100 Futures climbed 44 points, or 0.47%.
"Iran appears to be standing down, which is a good thing for all parties concerned," Trump said in a speech following Iran's strikes on several U.S. military bases.
"The fact that we have this great military and equipment, however, does not mean we have to use it," the president added.
2. Safe havens in full retreat
Investors have turned their backs on the USD/JPY, often used as a haven for risk averse investors, sending it sliding from a three-month high to a two-week low of 109.33 yen per dollar. Similarly, the USD/CHFhas been hit, also falling to a two-week low of 0.974 francs per dollar. Gold has given back the sharp gains made on Wednesday, and trades 0.9% lower on the day at $1,545.95 an ounce, around the levels seen at the start of the month.
The yield on benchmark 10-year U.S. Treasury notes stood at 1.874%, largely unchanged from Wednesday’s U.S. close, but well off the intra-day lows of around 1.705% seen on that day.
3. Crude remains in focus
Oil prices have been on a wild ride over the last couple of days, spiking sharply higher Wednesday amid fears the missile strikes by Iran on U.S. troops based in Iraq would lead to supply disruptions in the Middle East, before handing back these gains when a more conciliatory tone emerged.
However, the news from the Energy Information Administration that U.S. crude supplies edged up by 1.2 million barrels for the week ended Jan. 3, hit prices hard as this had followed declines in each of the previous three weeks. Analysts had expected to report a drop of about 3.6 million barrels.
Global benchmark Brent crude was up 48 cents to $65.75 a barrel by 7:30 AM ET (11:30 GMT), considerably off the levels above $70 since earlier this week.
U.S. crude futures were last at $59.84, having earlier hit $65.85, the highest since late April last year.
4. Hearing from FOMC members
A number of members of the Federal Open Market Committee are due to speak later today, namely Richard Clarida, Neel Kashkari and John Williams.
The FOMC holds eight regularly scheduled meetings per year, where it reviews economic conditions and determines the appropriate stance of monetary policy. The next meeting is due at the end of this month and thus investors will be parsing these speeches for clues as to the likely next move by the central bank.
In its December meeting the committee decided to leave the benchmark federal funds rate unchanged, at a range of 1.50% to 1.75%, after cutting interest rates three times in 2019.
5. British retail woes
The British retail sector is in the doldrums, amid worries about what the U.K.'s exit from the European Union means for exporters. The British Retail Consortium said total sales posted the first annual sales decline since 1995, with sales in November and December particularly weak. This corresponded with the period when speculation of a no-deal Brexit was at its peak.
Not helping matters were comments from outgoing Bank of England governor Mark Carney, who warned that central banks were running out of the ammunition needed to combat a potential recession.
Shares in Marks and Spencer Group PLC (LON:MKS), for a long time regarded as the bellwether of the U.K. high street, slumped over 9% after its latest results showed a slump in sales. GBP/USD also moved lower, dropping 0.5% to trade at $1.3031.
1. Markets shrug off U.S.- Iran tensions
Market jitters eased on Wednesday following frenzied early trading after a rocket attack by Iran on U.S. forces in Iraq raised the specter of a spiraling Middle East conflict.
Hopes grew the U.S. would stop short of strong retaliation after U.S. President Donald Trump tweeted "All is well!", and "So far, so good!".
Iran's Foreign Minister Mohammad Javad Zarif also tweeted that the Iranians "do not seek escalation or war".
Iran's missile attack came early on Wednesday, hours after the funeral of an Iranian commander who was killed by a U.S. drone strike last week.
2. U.S. futures regain ground, but Boeing crash weighs on Dow
U.S. stock futures clawed back their early steep losses, with the S&P 500 futures contract rising 10 points, or 0.3% by 7:30 AM ET (11:30 GMT), while Nasdaq 100 futures rose a similar amount. But Dow futures struggled to make headway, weighed down by a drop in shares of Dow component Boeing (NYSE:BA) in premarket trade.
Boeing shares were hit by news that a Ukraine International Airlines Boeing 737 airliner burst into flames shortly after take-off from Tehran on Wednesday, killing all 176 people aboard in a crash that an initial report blamed on engine failure.
A spokesman for the manufacturer said it was gathering more information.
The 737 does not have the software feature implicated in crashes of the 737 MAX. Boeing grounded its 737 MAX fleet in March after two crashes that killed 346 people.
3. Safe-haven demand wanes
Investor demand for safe haven assets waned as the knee jerk reaction in markets to the Iran strikes unwound. Gold which earlier brushed through $1,600 an ounce, eased to $1,582.
The yield on benchmark 10-year U.S. Treasury notes stood at 1.811%, down from a U.S. close of 1.825% on Tuesday, but well off session lows around 1.705%.
On currency markets, the attacks had sent the yen spiraling to three-month highs beyond 107.7 per dollar but gave up all those gains. Another safe-haven currency, the Swiss franc, also gave up gains.
4. Oil pares gains, inventory data awaited
Oil prices were higher but gave up most of their early gains as fears over the prospect of supply disruptions in the Middle East receded.
Global benchmark Brent crude was up 48 cents to $68.75 by 7:30 AM ET (11:30 GMT), after earlier rising to their highest level since mid-September 2019 at $71.75.
U.S. crude futures were last at $62.97, having earlier hit $65.85, the highest since late April last year.
The Energy Information Administration is expected to report a drop of about 3.6 million barrels when it issues official stockpile numbers at 10:30 AM ET (13:30 GMT), according to analysts’ forecasts compiled by Investing.com.
5. Private sector hiring data ahead
ADP employment figures are due out at 9:15 AM ET (14:15 GMT) ahead of Friday’s closely watched government nonfarm payrolls report for December.
Economists are predicting a rise of 160,000 in payrolls for the month, up from the tepid rise of 67,000 seen in November.
The market is looking for about the same rise for nonfarm payrolls when the Labor Department weighs in with official figures.
--Reuters contributed to this report
1. Geopolitical tensions ease
Calm returned to markets Tuesday, but sentiment remained fragile as investors became less anxious about the chances of an all-out conflict between the United States and Iran in the absence of any fresh developments in the standoff between the two countries.
Tehran and Washington have been trading threats since Friday, when a top Iranian military commander was killed in a U.S. airstrike. The attack stoked concerns about all-out war if Tehran retaliates.
“While the risk of conflict has increased, the reality is this is likely to be limited to proxy skirmishes," said Tom Porcelli, chief U.S. economist at RBC Capital Markets. "The risk of a "hot" conflict seems low as Iran is unlikely to respond in such a way that risks a significant escalation from the United States."
2. Global stocks steady
U.S. stock futures pointed to a slightly higher open, with Dow futures rising 25 points, or 0.1% by 6:45 AM ET (1:45 GMT), while the S&P 500 futures contract was up a similar amount and the Nasdaq 100 futures was up 0.3%.
The gains came after U.S. equities reversed early losses on Monday as strong gains in the tech sector offset geopolitical tensions.
In Europe shares recovered snapping a two-day losing streak, boosted by gains in the tech sector. Asian markets also rebounded overnight after sharp declines on Monday.
3. Oil, gold pull back
Oil prices fell as investors reconsidered the likelihood of disruptions to Middle East supply, with global benchmark Brent crude down 47 cents to $68.47 by 6:45 AM ET (1:45 GMT) after earlier hitting an intra-day low of $67.91.
U.S. crude futures were last at $62.86 after falling 1.5% earlier.
Prices had surged during the previous two sessions, with Brent reaching its highest since September while crude rose to the most since April.
Gold prices also eased after scaling a near seven-year peak of $1,582.59 overnight as Middle East tensions cooled and investors booked profits.
4. Automakers in focus
British automaker Rolls-Royce (LON:RR) reported surging sales on Tuesday, giving some comfort to a sector that has been hit by slowing global demand. Sales at the luxury automaker jumped 25% in 2019 to a new record high, sending shares of Rolls-Royce owner BMW (MI:BMW) higher.
In contrast, shares in Aston Martin (LON:AML) plunged after it warned its annual core profit would plummet more than 45% from last year, citing weak demand in Europe.
Meanwhile, U.S. electric car maker Tesla (NASDAQ:TSLA) said Tuesday it has started work on building Model Y electric sports utility vehicles (SUV) at its $2 billion Shanghai factory, marking a new milestone for the company's first foreign car plant.
5. U.S. data eyed
The U.S. is to release trade data 8:30 AM ET (13:30 GMT), followed by figures on factory orders and the ISM non-manufacturing PMI at 10:00 AM ET (15:00 GMT).
Surveys of service sectors out overnight showed an improvement in the U.S., U.K. and EU, raising expectations that the closely watched ISM index of U.S. services will also show strength.
In the Euro Zone, data showed that the annual rate of inflation rose to 1.3% in December on the back of higher food prices, moving closer to the European Central Bank’s 2% target.
A separate report showed that Euro Zone retail sales jumped by 1.0% in November and were 2% higher from a year earlier.
--Reuters contributed to this report
1. Trump, Iran trade threats
Fears over the fallout from the U.S. killing of a leading Iranian military commander intensified on Monday after Iran said it would no longer abide by the 2015 nuclear deal, meaning it will no longer limit the amount of enriched uranium it holds.
Iran had already vowed to retaliate for the death of Qassem Soleimani who was killed in a U.S. air strike last week. U.S. President Donald Trump has warned of a "major retaliation" if Tehran hits back, deepening a crisis that has heightened fears of a major conflict in the Middle East.
2. Oil prices continue climb
Oil prices rose again Monday, building on Friday’s more than 3% surge amid fears of a disruption to energy supplies.
Brent climbed above $70 a barrel to its highest level since last September -- when Saudi Arabia’s Abqaiq oil processing facility was attacked. The global benchmark was last at $69.56 at 5:35 AM ET (10:35 GMT), up 96 cents, or 1.4%, from Friday's settlement.
U.S. West Texas Intermediate crude was at $63.77 a barrel, up 72 cents, or 1.1%, after touching $64.72 earlier, the highest since April.
3. Safe havens in demand
Gold prices rose to seven year highs, jumping to $1,582 per ounce, the most since since April 2013, while the yen and other safe-haven currencies were also in demand.
The Japanese currency hit a three-month high of 107.77 versus the U.S. dollar overnight and was last at 108.00. The Swiss franc was close to the four-month high of 1.0824 it reached against the euro on Friday.
The greenback was lower against a currency basket, with the U.S. dollar index sliding 0.2% to 96.28.
Sovereign bonds benefited from the safety bid with yields on 10-year Treasuries down at 1.78% having fallen 10 basis points on Friday.
"Iran is almost certainly to respond in some scale, scope and magnitude," said Lee Hardman, currency analyst at MUFG.
Therefore "market participants are likely to remain nervous until there is more clarity over how geopolitical tensions between the U.S. and Iran will proceed," Hardman said, noting that geopolitical tensions could hurt global economic growth, especially if the price of oil increases.
4. U.S. stocks set to open sharply lower
U.S. stock markets are set to open sharply lower on Monday, extending losses from Friday. By 5:35 AM ET (10:35 GMT), Dow futures were down 171 points or 0.6%. S&P 500 futures were down 0.6% while Nasdaq 100 futures were off 0.7%.
Geopolitical tensions along with data showing a larger than expected contraction in the U.S. manufacturing sector in December saw Wall Street's major indexes pull back from record highs on Friday.
European markets were broadly lower, while Japan’s Nikkei fell 2% overnight.
The calendar for U.S. economic data and earnings is very light, with just the service sector Purchasing Managers’ Index (PMI) due at 9:45 AM ET.
5. Euro Zone business activity near stagnation
Euro zone business activity remained close to stagnation in December, a survey showed on Monday, as an upturn in services activity only partially offset a continued decline in the bloc's manufacturing sector.
IHS Markit's final euro zone composite PMI edged up to 50.9 in December from November's 50.6.
In the U.K., a similar survey showed that the services PMI picked up slightly to hit 50.0 at the end of the year, indicating that activity flatlined, but businesses reported that optimism rose to its highest level in 15 months.
The report boosted the British pound against the (admittedly) softer U.S. dollar.
--Reuters contributed to this report
1. Oil back on the boil
Oil prices spiked on Friday after the U.S. killed a leading Iranian military commander in an air strike, heightening fears of a conflict in the Middle East that could disrupt energy supplies.
U.S. crude rose 3% while global benchmark Brent jumped 3.6% to more than $68 a barrel. The last time Brent hit these levels was in mid-September, when an attack on Saudi Arabian crude facilities sparked the biggest price jump in more than 30 years. Whether the increase in oil prices will be sustained hinges on if, when, and how Iran retaliates to the killing of General Qassem Soleimani.
September's oil price spike was short lived as Riyadh didn't respond to the attacks, which the U.S. blamed on Iran and which Iran in turn denied. However, if Iran fulfils its threat of "severe retaliation" now it could well magnify market moves.
2. Geopolitical risk premium
Global markets could remain under pressure in the coming days, with analysts expecting to see defensive stocks outperforming, downward pressure on Treasury yields and gains for safe-haven currencies.
Wall Street's major indexes fell from record highs on Friday, with the S&P 500 sliding 0.7%, snapping five weeks of gains for the index. Besides the escalation in Middle East tensions a bigger-than-expected contraction in the U.S. manufacturing sector raised concerns of slowing economic growth.
"There was a reinforcement of weak manufacturing activity and then you had the geopolitical spark," said Michael Antonelli, market strategist at Robert W. Baird in Milwaukee. "That's on top of the sentiment that the market has been overbought."
3. U.S. jobs report
A key question in global markets over recent months has been whether weakness in manufacturing will begin to hit jobs growth. In the U.S., the labor market has stayed relatively resilient despite weakness in factory activity and this along with solid wage growth has underpinned consumer confidence.
The final U.S. jobs report of 2019 showed that 266,000 jobs were added in November, the most in 10 months while the jobless rate of 3.5% was the lowest in half a century. December’s jobs growth is forecast to have eased to 160,000.
The labor picture suggests that President Donald Trump's trade war with China has not had much impact on the broader economy, which expanded at a 2.1% pace in the third quarter. Manufacturing hiring did take a hit, but hopes are high for a Phase 1 trade deal on Jan. 15.
4. Trade deal
Nearly two years of brinkmanship, stop-start negotiations and tit-for-tat tariffs could end on Jan. 15, the date that President Trump says will see Beijing and Washington sign a Phase 1 trade deal. But China has kept quiet on the subject and investors don't know for sure what the deal text will actually say, keeping global markets on edge.
In recent days, Chinese markets have basked in the afterglow of upbeat retail sales data, solid manufacturing gauges and fresh stimulus measures with the central bank slashing banks' reserve ratio requirements. But what next? Services PMIs published on Monday will be crucial, as will Thursday's inflation figures. Tuesday will bring data on central bank reserves, indicating whether Beijing's $3 trillion war chest is growing or diminishing.
5. Brexit bill
Britain’s parliament will reconvene on Jan 7 and will debate the divorce deal Prime Minister Boris Johnson has agreed with Brussels. The bill goes to parliament's upper house on Thursday and should allow Johnson to fulfil his pledge to "get Brexit done" by Jan. 31.
But concerns over the prospect of a no-deal Brexit are still weighing on the British pound, which is back below $1.31, from December highs above $1.35. Once parliament approves the agreement, the clock starts ticking on Britain's future trade relationship with the EU. If an agreement isn't reached by end-2020, the outcome may yet be that Britain leaves the EU without trade arrangements in place.
However, with one Brexit step likely taken by the end of the month, sterling could react more than last year to economic data. The final reading of December's U.K. services activity on Monday is expected to show a slight uptick though stay in contraction territory below 50. House price data on Wednesday could also offer clues on the strength of the property market now that there is a bit more Brexit clarity.
--Reuters contributed to this report
1. U.S. airstrike kills Iranian commander; Iran vows revenge
Iran promised swift retaliation after a U.S. airstrike in Iraq killed one of its most senior military leaders.
Qassem Soleimani was commander of the elite Quds force, an arm of the Revolutionary Guard, and was behind the recent expansion of Iranian military influence from Syria to Yemen.
He was widely seen as the second-most powerful man in Iran after Supreme Leader Ali Khamenei.
The attack represents a sharp escalation of recent tensions in Iraq between the various powers vying for influence there, and has further raised fears of a drawn-out conflict across the region.
2. Oil, havens surge
Oil and gold prices surged to their highest in four months in the wake of the attack as traders fearing a severe Iranian response moved to insure themselves against disruptions to world crude supply.
U.S. crude futures rose 3.7% to $63.48 a barrel by 6 AM ET (1100 GMT), while the international benchmark Brent rose 4.0% to $68.89 a barrel. Neither blend has been as high since the immediate aftermath of the attack on Saudi Arabia’s oil facilities in September, a move which the White House also blamed on Iran.
Gold futures, meanwhile, rose 1.6% to $1,551.95 a troy ounce. That’s its highest mark since President Donald Trump threatened to escalate the trade war with China back in September. Gold has been tipped for further gains this year by many investment analysts, who argue that with trillions of dollars of government bonds worldwide offering negative yields, the relative fundamentals of non-yielding gold look attractive.
3. Equities reverse Thursday gains
By contrast, U.S. stock markets are set to follow Asian and European markets lower when they open.
By 6:15 AM ET, Dow futures were down 355 points, or 1.2%, while S&P 500 Futures were down 1.4% and the Nasdaq 100 contract was down 1.6%.
In Europe, the benchmark Stoxx 600 index was also down 1.1%, with automotive and basic industries stocks faring the worst.
The S&P 500 contract showed an engulfing reversal pattern, having opened above the previous day’s close but then immediately fallen below Thursday’s low. That’s generally thought to be a clearly bearish signal by technical analysts.
4. U.K. housing market picks up; retail boost seen
The U.K. economy wasn’t all doom and gloom at the end of the year after all. House prices rose at the fastest rate in a year, according to mortgage lender Nationwide.
The lender’s closely-watched survey said prices rose 1.4% in December 2019 from a year earlier, an acceleration from a 0.8% rise in November and the fastest annual rise since November 2018.
In addition, fashion chain Next PLC, seen by some as a bellwether for the retail sector, revised its full-year guidance up after saying holiday season sales were slightly above expectations. The news kept Next’s and other retail stocks’ losses within those of the broader market.
That said, the U.K.’s construction purchasing managers index fell again in the month to 44.4 from 45.3, underlining that a key part of the economy is still shrinking.
5. Fed Minutes, ISM Manufacturing PMI due
The Federal Reserve will release the minutes of its December policy meeting at 2 PM ET (1900 GMT). We mistakenly reported in yesterday’s Top 5 Things that the release would be on Thursday but it was of course delayed by a day due to the New Year holiday. We apologize for the error.
The New Year holiday also means that the monthly employment report will be released on Jan. 10th, and not on the first Friday of the month as is usual.
For data geeks, there will at least be the ISM manufacturing survey, at its usual time.
1. Markets off to a flying start in 2020
World stock markets are starting 2020 with a bang, as markets reopen for the first time since President Donald Trump confirmed the Jan. 15 signing date for his ‘phase-1’ trade deal with China.
By 6:30 AM ET (1100 GMT), Dow futures were up 155 points, or 0.6%, while the S&P 500 Futures contract posted similar gains and the Nasdaq 100 futures was up 0.7%.
Gains were even bigger in Europe, where markets are supported by a general perception that the valuation discount relative to U.S. widened sharply in 2019.
In Asia, the Shanghai Composite rose to its highest in eight months while Hong Kong’s Hang Seng Index also rose 1.3%, while India’s two main indices closed near all-time highs on hopes of fresh fiscal stimulus.
2. China cuts reserve ratio requirement
The other big support from markets is coming from China, where the central bank again loosened its reserve requirement for banks, freeing up the equivalent of $115 billion in liquidity.
The move is the latest in a series of small steps to loosen monetary conditions since the U.S.-China trade war began in earnest in the spring of 2018. It comes ahead of a seasonal spike in demand for liquidity from local banks ahead of the Chinese new year, and ahead of a flood of new debt issuance by local authorities for the year’s planned infrastructure projects.
Analysts said the move may prefigure further gentle declines in the PBoC’s policy rate. The yuan was broadly stable at 6.9632 to the dollar.
3. Europe's factories couldn't see the end of 2019 quickly enough
Markets around the world were shrugging off as old news the latest round of purchasing manager indices from IHSMarkit, which showed Europe’s factories in particular still struggling with the effects of last year’s slowdown.
Upward revisions to both the French and German manufacturing PMIs helped the euro zone PMI to a final reading of 46.3, up from a preliminary 45.9 but down from November and still clearly below the 50 level that separates growth from contraction. The U.K. PMI, meanwhile, fell to its lowest since late 2012 under the combined uncertainties of Brexit and the general election.
China’s fell by a more modest 0.3 to 51.5, a three-month low but still near its highest in the last 18 months. Sentiment was in any case supported by reports that industrial profits had rebounded strongly in November.
4. Fed minutes, jobless claims due
Apart from the PMIs (the U.S. one is due at 9:45 AM ET or 1445 GMT), the data calendar’s only highlights are the Federal Reserve’s minutes from its December policy meeting, which are due at 2 PM ET.
There are also U.S. initial jobless claims, as usual, at 8:30 AM ET. Economists polled by Investing.com expect a figure of 225,000.
5. FDA set to reprieve menthol in vaping ban
The U.S. Food and Drug Administration is set to water down its ban on vaping products, according to The Wall Street Journal, whose sources said the initial plan for a total ban would be unpopular in some key states in election year.
The WSJ said the FDA aims to pull from shops all e-cigarette refill pods except those formulated to taste like tobacco or menthol. Menthol is thus set to get a reprieve, while the fruit- and mint-flavored products in vogue with younger users are set to be nixed.
1. Global Markets Celebrate New Year’s Day
Stock markets in the U.S., Europe, UK, Switzerland, Canada, Australia, New Zealand and Japan will remain closed on Wednesday in observance of New Year’s Day.
This time of year tends to be beneficial for investors as the so-called Santa Claus rally has historically given stocks on Wall Street a short-term boost.
During the final five trading days of the year and the first two trading days of the new year, the S&P 500 has posted a 1.3% gain on average since 1950, according to the Stock Trader’s Almanac.
2. Fed FOMC Meeting Minutes
The Federal Reserve will release minutes of its December policy meeting on Friday at 2:00PM ET (19:00GMT).
The U.S. central bank held interest rates steady following its meeting on December 11, in a widely expected decision, and signaled that borrowing costs are likely to remain unchanged for some time.
New economic projections showed 13 of 17 Fed policymakers foresee no change in interest rates until at least 2021, hosing down expectations for a rate hike any time soon.
3. U.S. ISM Manufacturing PMI
The U.S. Institute for Supply Management (ISM) will publish its manufacturing survey for December on Friday at 10:00AM ET (15:00GMT), as investors look for more clues on the strength of the sector which has been hit hard by the U.S.-China trade dispute.
The data is forecast to show a slight improvement to a reading of 49.0, up from 48.1 in October.
Anything above 50.0 signals expansion, while readings below 50.0 indicate industry contraction.
The purchasing managers' index (PMI) is seen as a good indicator of economic conditions and it is even preferred by some analysts to gross domestic product, which might be affected by poor seasonal adjustment and is prone to revisions.
4. U.S. CB Consumer Confidence
In addition to the manufacturing data, the Conference Board will release its December update on U.S. consumer confidence at 10:00AM ET (15:00 GMT) Tuesday.
The consensus forecast is for a reading of 128.2, improving from 125.5 in October.
If confirmed it would be the best reading in three months.
5. Chinese Manufacturing Surveys
The China Federation of Logistics and Purchasing is to release data on December manufacturing sector activity at 01:00GMT on Tuesday, amid expectations for a modest downtick to 50.1 from a reading of 50.2 in October.
The Caixin manufacturing index, which focuses more on small and mid-sized firms, is due at 01:45GMT Thursday. The survey is expected to dip by 0.1 points to 51.7.
Under pressure from faltering domestic demand and bruising U.S. tariffs, China's economy cooled to a near three-decade low in the third quarter, pressuring Beijing to roll out more stimulus to avert a sharper slowdown.
1. No end in sight to the U.S.-China struggle for supremacy
The trade war between the U.S. and China, which hobbled the world economy almost single-handedly in 2019 is likely to leave deep marks on 2020 too.
The International Monetary Fund estimated in October that the tariffs imposed by both sides, and the far-reaching uncertainty they have caused, will shave $700 billion of value off the world economy next year, the equivalent of 0.8% of global gross domestic product.
The end result may be less extreme, given the apparent progress in talks earlier in December, in which China agreed in principle to raise its purchases of U.S. farm goods in return for a partial reversal of import tariffs on some goods it sells to the U.S. There is still no date for a signing ceremony, and neither side has published a draft text of the deal, but tariff cuts agreed last weekend by the Chinese government look designed to smooth the way for it being done early in January.
However, even after that, most existing tariffs will remain in place. As long as key issues such as intellectual property rights and government subsidies are addressed by China, a return to the status quo ante seems highly unlikely, while other fronts of engagement - notably Hong Kong, North Korea and Taiwan - could flare up at any time.
That’s especially true now that the Democratic Party’s presidential candidates are signalling a willingness to confront China on issues from trade to human rights and technological supremacy – showing that whoever is in the White House by the end of 2020, the trade war – in some guise – will still be going strong.
2. Election to cast a long shadow over the Fed
The U.S. Presidential election in November will cast a long shadow ahead of itself in the months running up to it – a shadow that will cover the Federal Reserve among many others.
Opinion polls and bookmakers give President Donald Trump an even chance of re-election (assuming he survives the current impeachment process), something that would pave the way for another four years in which trade and fiscal policy are the cardinal factors for market developments, with the Federal Reserve reduced to the role of cushioning any shocks – whether to the upside or downside - that those policies generate.
For now, Investing.com’s Fed Rate Monitor Tool sees the key fed funds rate target range ending 2020 where it will start it – at 1.50%-1.75%. But that depends largely on what policy choices Trump makes between now and November.
If Trump chooses to avoid escalating the trade war, then U.S. inflation is likely to rise under the influence of a tight labor market and a $1.2 trillion budget deficit. Upward pressure on U.S. interest rates will start at the long end of the bond market, while fresh presidential browbeating via Twitter will keep U.S. short rates anchored, as the Fed hesitates to take action that may come across as politicized in an election year.
If, by contrast, Trump feels the need to energize voters with aggressive actions toward China (or indeed the EU, Mexico, Canada or elsewhere), then the Fed may have to pull out another ‘insurance’ rate cut.
Investing.com’s Fed Rate Monitor Tool sees a total of one 25 basis point cut as the second most likely outcome for 2020 at present.
3. A long time ago, in a Hollywood boardoom far, far away…
Forget Star Wars – 2020 will be the year that the streaming wars are unleashed in all their fury.
The year will start with Reed Hastings’ Netflix (NASDAQ:NFLX) defending a very handy first-mover advantage – it currently has just under 160 million subscribers worldwide and is very much the first name that comes to mind in the space of on-demand video streaming.
However, that position is under threat from deep-pocketed rivals, with both Apple (NASDAQ:AAPL) and Walt Disney (NYSE:DIS) having launched rival services in November. Disney, with its unparalleled back catalogue and its dominance of live sports programming, is set to be a particularly tough competitor. CEO Bob Iger says he’s targeting 90 million subs by 2024. The first 10 million signed up on day one.
Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T) will enter the fray next year: NBCUniversal’s Peacock offering is due for launch in April and WarnerMedia’s HBO Max is due in May. And as with so many other sectors, Amazon.com (NASDAQ:AMZN) remains a potentially powerful and margin-crushing competitor.
The good news is that most analysts see plenty of room in the market for multiple providers. The less good news is that no-one knows exactly at what price point that room starts to shrink. Disney has had to undercut Netflix (NASDAQ:NFLX) substantially to guarantee escape velocity for its service. Later launchers may find that problem even more acute.
And yet arguably none of the companies lining up to provide those content services has as much of a challenge as Roku (NASDAQ:ROKU), which specializes in smart TVs tailored for streaming platforms. After quadrupling in 2019, its shares are trading at a multiple of 15.2 times expected 2019 revenue. That might be the hardest billing of all to live up to.
4. Oil faces a new glut
The global oil market faces a difficult start to 2020, as sluggish world growth continues to ensure that supply grows faster than demand.
The agreement earlier this month by the Organization of Petroleum Exporting Countries and its partners, notably Russia, to cut supply by a further net 500,000 barrels a day from January through March has convinced traders there will be no immediate glut. Even so, the International Energy Agency says global stockpiles could grow at 700,000 barrels a day in the first quarter of the year.
“The OPEC cuts didn’t fully solve the problem,” says Bjørnar Tonhaugen, head of oil market research at Rystad Energy. “Instead they offer a light bandage to get through the first quarter of 2020.” After that, he says, fears of over-supply will surely revive.
That’s reflected in the U.S. Energy Information Administration's prediction of an average crude price of just over $55/barrel for U.S. benchmark West Texas Intermediate next year, and $60.51/barrel for the global benchmark Brent.
Those prices mean that for many U.S. shale producers, life will stay precarious. Their bigger integrated rivals, meanwhile, face higher costs of capital as politicians and investors pressure the sector to expose more clearly the Climate Change risks embedded in its business models.
Pricing and capital costs means U.S. production growth is set to slow to 900,000 barrels a day next year, according to government forecasts. That’s down from 1.3 million b/d this year and 1.6 million b/d in 2018. For the first time in at least three years, the U.S. will not meet all incremental global demand on its own. The IEA expects world oil demand to rise by an average of 1 million barrels a day over 2020.
5. Europe’s trade troubles
The dead hand of trade uncertainty will continue to weigh on the European economy, frustrating the European Central Bank’s exit from its policy of negative interest rates, putting further pressure on the profitability of the Eurozone banking system, and keeping a cap on the euro in the foreign exchange markets.
Trade hazards are many, and ways around them are few. Higher U.S. tariffs on China have deterred business investment in both countries, hitting Eurozone exports of capital goods. The EU is also the obvious next target for any new trade offensives if the Trump administration declares a truce with China ahead of the election.
Nor is the EU likely to take recent U.S. tariffs in relation to Airbus subsidies lying down: the World Trade Organization will likely allow it next year to levy tariffs of its own on U.S. companies in return for hidden subsidies to Boeing (NYSE:BA).
Finally, there is the fate of relations between the EU and U.K., which will leave the bloc at the end of January. U.K. Prime Minister Boris Johnson has signalled he wants a trade deal by the end of 2020, when the transitional phase of his Withdrawal Agreement is set to end. That sets the stage either for some frenzied negotiating or, more likely, a trade agreement that will be done in stages, each one doing just enough to stop a disorderly disruption of trade and financial flows between the two. Even so, the threat of such a scenario will be constantly depressing confidence and demand at the margins, ensuring that Sterling, too, struggles to build on the gains of the last quarter.