Stock bulls bolster their earnings view

The NFIB optimism index jumped to a four-month high in November
Newsfeed12 Dec 2019
Photo credit: AFP Photo

Market news selected by the DBS Chief Investment Office


Angst over a profit recession has kept Wall Street on edge all year, but rising confidence among a cohort of business owners is giving stock bulls reason to relax.

The National Federation of Independent Business (NFIB) optimism index jumped to a four-month high in November – thanks largely to improved corporate earnings trends, which posted the biggest increase in about two years. That portends well for US stocks, with the trend historically coinciding or leading annual growth in S&P 500 Index trailing earnings per share.

Amid a slower economic backdrop and the ongoing US-China trade tiff, the outlook for earnings has steadily deteriorated all year. Analysts expect 2019 profit growth of 1.4%, down from a forecast of about 8% at the beginning of the year. But an improved outlook has many betting on a rebound in 2020, with earnings projected to expand 9.2%, data compiled by Bloomberg show.

In November, sentiment among small US businesses climbed by the most in more than a year, with owners saying profit trends are looking up. The composition of the NFIB report showed that earnings trends were the biggest driver of the index’s increase. US job gains also roared back in November, with payrolls jumping the most since January and beating all survey estimates.

Meanwhile, US stocks rose with Treasuries Wednesday (11 December), while the dollar fell after the Federal Reserve left interest rates unchanged and its chairman signalled it would keep policy “somewhat accommodative”.

The S&P 500 halted a two-day slide as investors viewed the last Fed decision of the year as dovish because the central bank signalled rate hikes are unlikely unless there is a meaningful change in the outlook for the economy. The 10-year Treasury rate fell below 1.8%.

The Dow Jones Industrial Average increased 0.11% to 27, 911.30 amid more trouble for The Boeing Company’s Max plane and Home Depot Inc’s weak forecast. The S&P 500 rose 0.29% to 3,141.63 and the Nasdaq Composite traded 0.44% higher to 8,654.05. – Bloomberg News.



The UK bond market has lagged the recent optimism for a Conservative majority seen in the sharp move higher in the pound. Still, if UK Prime Minister Boris Johnson does indeed win on Thursday (12 December) then a selloff across the curve should only be mild.

The cautious approach of gilts into the election leaves the 10-year yield trading at the top of recent ranges. Volatility is not pricing a particularly pronounced move following the election, with the curve potentially shifting initially higher by around 10 bps.

Implied volatility on the 10-year swap rate is suggesting a potential range of around 25 bps over the next three months, which does not appear unreasonable relative to the Brexit premium and macro picture. Over the next year, implied volatility on the 10-year swap implies a 68% chance of yields trading between 0.65% and 1.30% vs current spot rate of 0.97%.

The Sonia curve seems reasonably in line with the potential weighted election outcomes, with Bank of England on hold in the case of a Conservative majority, and uncertainty over the Brexit transition period vs potential easing with a hung Parliament.

Betting markets are pricing an outright Tory majority but the margin of error on polling models are large. Assuming a stable majority is achieved, and the withdrawal agreement is signed off by Parliament, the outcome of the transition period remains unknown and poses risk of renewed downward pressure on GBP assets into the 1 July 2020 transition period extension deadline.

One of the main losers on the unwind of no-deal Brexit risk has been the frontend of the inflation markets. A Conservative majority should see further steepening of the Retail Price Index curve as the frontend has room to move toward realised prints, conditional on the pound remaining supported, while a hung Parliament likely will see some unwind.

Selling GBP rate volatility has been a profitable trade this year, taking advantage of the Brexit-uncertainty premium and subsequent low realised volatility. – Bloomberg News.

The Stoxx Europe 600 Index rebounded 0.22% to 406.22 on Wednesday (11 December).



Bank of Japan (BOJ) officials see a sizable impact from government stimulus announced last week (ended 6 December), raising the likelihood that the bank will upgrade its economic forecasts for the first time in a year next month, according to people familiar with the matter.

The possibility of higher growth projections would likely strengthen a building view among economists that the BOJ will stand pat on key policy measures at its meeting next week and for some time to come, barring unexpected developments in US-China trade talks, markets, or economic data. The BOJ does not revise its growth projections until January, when it next issues quarterly forecasts.

The package announced last week by Prime Minister Shinzo Abe includes JPY13.2t (USD121b) of fiscal measures to support an economy facing an export slowdown, typhoon damage, and the fallout from a recent sales tax hike.

Officials at the BOJ expect the government’s stimulus to boost growth from the next fiscal year starting in April, the people said. The central bank’s projections are likely to be largely in line with the government’s view, according to some of the people.

The government said its fiscal measures will boost growth by 1.4%pts over time, but has not made clear the specific impact for the next fiscal year. Economists have cast doubt on the government’s figure for boosting growth, but they largely agree that the package makes it easier for the BOJ to hold off on extra stimulus. – Bloomberg News.

The benchmark Nikkei 225 Index rose 0.08% to 23,410.55 at the open on Thursday (12 December). It slipped 0.08% to 23,391.86 on Wednesday.


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