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Welcome to LCG’s preview for the week beginning February 26th. We will return with a video from Kelly and Jasper next week. In today’s written report, we discuss stocks in a holding pattern, new Fed Chair Jay Powell’s first testimony to Congress and the Italian election. We also run through the top earnings and economic data on tap this week.
Stocks in a volatile range
The last three weeks in the stock market have been a change up from the slow burn uptrend of 2017. Stocks had one week of selling off, the next week was the bounce-back then last week they were stuck in a volatile trading range. These three stages are somewhat predictable. Where we head next is less obvious. A break higher or lower both seem equally feasible outcomes.
Powell testimony: to calm the storm?
For his first testimony to Congress which comes two weeks after the biggest one-day points decline in US stock market history we think Jay Powell plays his cards pretty close to his chest. We assume Powell will tread a fine line between the slightly hawkish FOMC minutes released last week and other Fed speakers like Bullard and Kaplan who have talked cautiously about the need for a fourth rate hike this year.
The reason / justification for the market sell-off was fear of rising inflation resulting in a faster pace of rate hikes from central banks. In meetings and speeches since market corrected, central bankers have been slow to acknowledge that inflation is set to raise faster than earlier estimates. Nonetheless, bond yields have continued to push higher with 10-year bond yields at a 4-year high. Higher yields make stocks compete for investor cash. If yields do continue to rise, it makes sense that eventually yields hit a level that causes another jerk lower for stocks. The Dollar’s downtrend has been resilient while global yields have been rising but any hawkish surprise from Powell could tip the balance back in favour of the buck.
The Italian election
The Italian election takes place Sunday March 4. There is a risk that markets are under-pricing the chance of another messy European election result, particularly with the populist Five Start movement set to receive the most votes. The Italy-Germany yield spread has been tightening, if investors were pricing in political risk to Italy it would be going the other way.
Watch out for our Special Report on the Italian election, released Monday.
Key corporate results this week
Monday – Bunzl, Berkshire Hathaway
Tuesday – Standard Chartered, GKN, Greggs, Provident Financial, Direct Line, Macy’s, Square
Wednesday – Bayer AG, Carillion, Foxtons, ITV, Travis Perkins, Admiral, Taylor Wimpey & Salesforce.
Thursday – Peugeot SA, Bovis Homes, Capita, Merlin Entertainments, WPP, AMC Entertainment, Best Buy & Gap
Friday – Jimmy Choo, London Stock Exchange, Spire healthcare, JD.com & Foot Locker
Economic calendar highlights
It’s a slow start on Monday then there is Eurozone consumer confidence, German inflation and US durable goods on Tuesday, China PMIs, Eurozone CPI, revised US Q4 GDP and a speech from Fed Chair Powell on Wednesday, US core PCE inflation on Thursday with little of note on Friday
Thank you for reading, good luck trading this week and if you want to watch the usual videos as soon as they are released, please follow LCG on Twitter, Facebook and YouTube.
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