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Episode 2: ISM data and BMW earnings impact on equity market

Episode 2 - Part 1

How will ISM data and BMW earnings affect the equity market?

Published on: November 4th, 2019 • Duration: 6 minutes

In this episode, we review the non-farm payroll numbers from last week, and look at manufacturing data for both the U.S. and Europe - specifically BMW.

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08:05
  • [00:00:04] Welcome to Before and After. This show is all about opportunities around upcoming events and announcements and helping you understand not only what could happen, but what you can take away from what did happen. And the upcoming US non manufacturing, ISM is going to tell us a lot. Let's take a look at some of the possible scenarios in the before portion of our episode. The Institute of Supply Management or ISM non manufacturing is absolutely key to upcoming market action as it's this part of the US economy that isn't supposed to be a drag,  well, not yet anyway. Unlike manufacturing, which has been taking a beating of late, The ISM non manufacturing represents what's supposed to be the healthy parts of the economy, like business activity and employment. The manufacturing sector grabs most of the headlines, but the non manufacturing or services sector is a much larger component of the US economy. The September number released on October the 3rd was a big shock and the market did not like it. The instant it came out the S&P plunged 1.2% in less than 15 minutes, an accelerated selloff, especially for this subdued volatility environment. Take a look at this Refiniv chart. The September non manufacturing ISM report missed badly. The expectation of 55.2 instead came in at 52.6 and remember, the magic number is 50, below that and we're in contraction territory. The manufacturing sector can contract without creating a recession, but on both the last two occasions that the non manufacturing sector was heading to 50 and perhaps even below, the economy was heading towards recession. This is a key barometer to gage whether the US economy is deteriorating and whether the slowdown is spreading to the services sector and then ultimately the consumer. So what should we be looking out for? A solid beat could create an upside panic in equities, followed by a key date reversal in stocks. A bit like a last hurrah before people lock in profits. Inline probably means tepid buying on unimportant volume. A miss and you could very well see the same instant reaction as October's number, with stocks dropping into an air pocket and worrying about what happens until the next rate setting meeting. Sub 50 and people will be reaching for the hardhats as the calls of recession will certainly start ratcheting up again. If you're looking for a way to play this though, consider the juicy way. The retail ETF, it had a 3 per cent intraday range move at the last non manufacturing ISM. This week we are going to look at BMW as they will announce earnings and we want to examine some possible actions. Take a look at this Refinitiv chart. BMW is earnings announcements come at a time when they face all sorts of macro issues. Autos have been at the epicenter of the slowdown in global manufacturing that has spread along the supply chains from China. It has seen a steep decline in global sales, where changes to emissions policies in China and Germany have also had a huge impact. BMW is at ground zero of the macro slowdown with additional direct adverse effects from the trade wars and Brexit. Germany's manufacturing industry, dominated by engineering and particularly the auto sector, has been in recession territory for six months without officially registering a full blown recession. In fact, Germany registered one of the worst manufacturing figures in the developed world last month when their manufacturing PMI came in at a horrendous forty one point nine. So BMW has got every possible impediment to delivering results. Now, despite those roadblocks, the German autos have proven themselves to be robust. But BMW's results will really put that to the test. What could happen to the stock? We should look at BMW's biggest competitor, Daimler. Daimler reported on the 24th of October and after a slight earnings beat on severely lowered estimates, the stock rallied that day, up 3.4%. Daimler finished the month as the best performing stock in Germany's headline equity market, the DAX up 14%, while B MW was only up 6 %. No one expects much from BMW on the top line revenues, so this is the time for them to show they've learned how to navigate an increasingly complex global supply chain. What's the bottom line here? Since nobody expects much, the risk seems to be squarely on the upside. A bullish tape in Germany this week, even if the German PMIs are wretched, which is what we all expect, would only bolster this take. Negative headlines with constructive price action would certainly be a strong buy signal for the fourth quarter. The big caveat is if we have a horrendous miss and a lowering of guidance, this could lead to profit taking in the DAX index, which was one of the best performing indices in the world last month, up three point five percent, largely on optimism that the bottom is priced in. Okay, so ISM and BMW are two big events to be aware of this week. But what about what happened last week? I'm referring, of course, to the hugely important, After, the non-farm payrolls. A pretty decent beat came in at 128,000 new jobs versus an expectation of 89,000 and a huge upward revision that added an additional 95,000 jobs to the previous readings. So it seems the Fed might just have been right to put a pause on rate cuts, which looked like they may already be adding some positive mojo to the economy. The S&P has rallied about 40 basis points off of it, which is not exactly earth shattering, but we might be close to a near-term top in equities as the Fed cuts is being fully digested, along with the realization that the Fed might now be on hold for some time. But watch US banks who will likely love the fact that the economy is firm and that rate cuts are on hold. It gives their margins a tiny bit of respite. There it is,  ISM, BMW, non-farm payrolls; three events that have or will shape the markets for the rest of the year. I'm Jamie and this is before and after the twice weekly market show from Refinitiv. Join us again on Friday and be sure to share this video.

Episode 2 - Part 2

Why do global manufacturing numbers and Spain’s election matter to markets?

Published on: November 8th, 2019 • Duration: 8 minutes

In this episode, we examine important economic numbers like global manufacturing and explain why the election in Spain will be critical for equity markets going into 2020.

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08:13
  • [00:00:04] Hello and welcome to the Friday edition of Before and After, the twice weekly market show from Refinitiv. As you know, our goal is to look at the possibilities around events that will shape the markets in ways both big and small. Today, we will discuss Japan's machinery orders and the upcoming Spanish elections and we go back and look at the non manufacturing ISM for our after study. Let's get right into it with Japan's machinery orders. Arguably, the manufacturing slowdown that swept across the world started in the Far East when China put the brakes on its credit fueled growth. Now, clear signs of weakness have turned up in areas as far apart as Asia, Germany, and now even with the US manufacturing data. This weakness has investors concerned that this slowdown will turn into a full blown recession and yet in recent weeks, we've seen equity markets in some of the most affected places starting to rip higher. Germany, Taiwan and Japan and the US is making all time highs. Are Equity markets getting ahead of themselves or are they pricing in a turn that we haven't yet seen in the data? Japan's proximity to China and its heavy exposure to industry has counted against its economic well-being over the last year, and its quarterly GDP has been flirting with zero growth over the last few years. Not to mention merchandise export growth has been in negative territory throughout all of 2019. One of the key indicators of health of the manufacturing sector is the performance of Japan's machinery orders. Last month, the year on year number hit its lowest level since 2014, the last time the global economy suffered a significant manufacturing slowdown, but, if global equity markets are right, shouldn't this number be bouncing from these lows? The latest poll of economists is not exactly optimistic, forecasting a year on year decline of ten point eight percent. Yes, that would be an improvement on the previous month, but it would still be one of the ten worst readings since 2010, hardly indicative of a global manufacturing economy that's made it through the worst. So what should we expect? Bond yields are unlikely to react as the Bank of Japan has that market all sewn up. Strong data should weaken the Japanese yen because if global growth is truly turning higher, then Japanese investors will take more overseas investment risk selling yen to buy foreign assets. Most of the action should therefore take place in the equity market. If the year on year number is another shocker and that's got to be anything worse than the forecast of minus ten point eight per cent, then we'd be looking for profit taking on the Nikkei 225 which are Refinitiv charts shows us has gained 15 %  since the summer. If it's worse than the previous month below -14.5%, then global investors should be reevaluating their newfound optimism. Anything above -4% and this could indicate that the global manufacturing sector is indeed attempting to reverse engines and that global equity indices have correctly predicted a bottom in the cycle of manufacturing weakness. Either way, this will be a key signpost on the way to understanding the health of global manufacturing. That's what's happening in Japan. What else is going on across the globe that might interest investors? This next before topic could certainly be seen as an after because for the fourth time in four years, Spain is heading back to the polls.  On the heels of the no confidence vote in Prime Minister Mariano Rajoy, amidst a massive corruption scanda, Prime Minister Pedro Sanchez of the center left Spanish Workers Socialist Party was elected without a clear majority.  Without cross-party support, he has failed to form a consensus government by the September 23 deadline. The severe jail terms recently handed out to Catalonian separatists, which has ignited unrest in the region, will add another layer of tension. There is the distinct possibility that Sanchez joins Italy's Matteo Renzi and the UK David Cameron in falling to another populist backlash. European elections are seemingly the EU's ever present banana skin. European leaders probably don't mind another hung parliament, but they would cringe at the thought of another European bastion of eurozone conformity falling into the hands of a populist party. Very few expect that there will be an outright victor. Most expect there will be a coalition. But the question is, will it be left leaning or will it be right leaning? And how populist will it be? Spain is heading to the polls with home sales that are on the slide and an economy that is slowing. Here are the market instruments we should be paying attention to. In Spain. Spanish 10 year bond yields and Banco Santander is common stock are a good place to start. Yields have been compressing on the back of the global bull market in bonds, with Spain's 10 year recently reaching their lowest level ever. Look at our Refinitiv chart. We see that Santander is one of the largest members of the IBEX 35 and of course, Spain's biggest and most important bank. Santander stock is hovering near its 20 year lows and in constant jeopardy of plummeting through support. Down 6 percent on the year. It's the real reason why Spain's IBEX is only up 10 percent and lagging the other European major indices in 2019. An outright, though unlikely victory with either the Socialists or the conservative Popular Party would provide some relief for Spanish assets. The IBEX should outperform Europe on that outcome. After all, it does have a lot of catching up to do. Most likely is that a coalition will need to be formed with one of the other main parties, the center leaning Cuidadanos, the socialist Podemos or the right wing VOX party. The risks are that the populist, far right or far left leaning parties gain a much stronger hand. The European project has come under fire from populists and this could unsettle the bond market and bank stocks. Remember what happened in Italy when election uncertainty picked up? Italian bond yields had a nasty spike in the middle of 2018, and a repeat in Spain would hurt the bank stock too, with repercussions across the eurozone banking sector that has recently been enjoying a rally. Of course, there's always a decent chance that this election again fails to break the deadlock that would leave Spanish assets, treading water and looking for a life preserver in the form of external influences to decide their direction. Ultimately, the big hope for markets is that a clear victor emerges because that delivers certainty regardless of political persuasion. Time to look back at the non manufacturing ISM and see what we can learn from what happened after the market reacted. We theorized that a rapid rebound from the previous month lows should see risk assets head off to the races. Confirmation of a slowdown would lead to worrie, but then again, the expectation of even more accommodation from the US Central Bank. Good news, it looks as though the economy is not collapsing after all. Non manufacturing ISM came in stronger at 54.7 versus an expectation of 53.5. This was a decent rebound from the three year low. This gave the market a slight pop before ultimately giving up on those gains. Given this was a beat, maybe market participants are not nearly so worried about the slowdown, as many headlines would have us believe. In fact, it looks like the case for a robust economy has been properly valued. After last week's very strong payrolls. Again, it's going to be difficult to get a strong risk on bid with equities at all time highs, even with very solid numbers going forward. It may even be that from this point on good data is bad news because it will price out the likelihood of further rate cuts in the US. As we all know, global equities love rate cuts and liquidity injections more than they love economic growth. And remember, the US has not fallen into recession in the last 20 years when this data point has been above 50. That's it for this episode of Before and After the twice weekly market show from Refinitive. I'm Jamie McDonald. Be sure to like subscribe and hit the bell for notifications and I'll be back on Tuesday.