The lure of another set of robust, tax-cut enhanced U.S. earnings due at the end of the week is mostly still outweighing concerns about the damage being done to global profit margins, supply chains and relations as tariffs ratchet higher.
Equity markets drift
Chinese Producer Price Inflation that revealed a touch of heat from frothy oil prices but not much more show trade conflict risks remain largely theoretical. Arch economic optimists may believe such conditions can be sustained regardless of increasing trade restrictions, but they are in a minority. Hence chunks were sheared off early-AM Wall Street future gains, before demand returned, though still left them off highs. European indices are not having a smooth ride in positive territory either.
The dollar’s latest turnaround
The pattern is reminiscent of the broad lack of equity market momentum seen over the last month and a half which left global shares vulnerable to yield-related panics like the one that flared up in Italy and the end-June yuan free fall. Hints that the latest impediments of the dollar’s grind may be complete are more definitive on Tuesday. The greenback is only partially fuelled by soft UK factory and industrial data and a faster than expected deterioration of German economic sentiment, according to ZEW snapshots. A Brexit-fractured government that brought an end to sterling’s hopes of regaining $1.33, if not PM Theresa May’s position, turned out to be the trigger to reinstate real-time advantages for the greenback from underlying yield, economic, global liquidity and latterly, even speculative positioning. With no cracks clearly discernible in the FOMC’s economic confidence, Treasury traders have now begun to tighten the screws again too. The 10-year yield is set for a third consecutive day of weakness. If seen, it would set 2.8070% on Monday as a floor. The pause has also helped the dollar recouple with benchmark borrowing costs at a more orderly relaxed pace. Still, it is the structural and long-term nature of the dollar’s advantages that have encouraged the market to frequently favour momentum elsewhere. Such episodes are likely to continue.
PepsiCo’s tax expense
The earnings season has fizzed into investor consciousness with PepsiCo’s Q2 earnings. They make for a fair start to proceedings, if not a stellar one. Marginal variation in the consumption of Doritos, Cheetos and soda can be a reasonable lagging indicator of main street confidence. Whilst the group maintains its outlook for the rest of 2018, a $16.09bn revenue result was in fact $500m above forecast. An additional “transition tax expense” of $777m may have been partly responsible for unchanged guidance, and for a quarterly earnings per share miss. The unexpected tweak may signal lingering tax-related adjustments in the pipeline elsewhere following late-2017 legislation changes that brought a swathe of write downs across large banks and other industries.
Bank of Canada key till Friday
The main macroeconomic events are in the second half of the week: Bank of Canada is likely to raise its key rate by 25 basis points on Wednesday. With hike expectations baked, absent a major surprise, the statement will be the main news. If bullish commentary for the Canadian dollar is moderated, a soft Loonie story will back our view that the dollar’s next intermittent uptick has begun. U.S. PPI is also due tomorrow before a raft of European readings on Thursday, including German inflation and EU output. In the context of the last few weeks, the most pivotal releases over the next few days may well now come from China – trade on Friday and industrial output on Monday.